Ask an Expert - Compliance
Ask A Compliance Expert By:
Jeff J. Groves
President
ComplianceWorks Inc.
1874 South Pacific Coast Hwy. #252
Redondo Beach, CA 90277
Phone: (310) 350-8402
Email: jgroves@complianceworksinc.com
Web: www.complianceworksinc.com
Jeff Groves currently consults with broker-dealers and investment advisors about SEC and NASD regulations and assists in the preparation for regulatory audits. Mr. Groves has 18 years of industry experience and has served as Chief Compliance Officer and Chief Administrative Officer for an investment advisory firm and a broker-dealer. He is NASD/Wharton certified as a Certified Regulatory and Compliance Professional (CRCP). Prior to his current position with ComplianceWorks Inc., Mr. Groves served as a lead consultant with ComplianceMAX Financial, a large compliance technology firm in San Diego. He was a partner with the aforementioned dually registered investment advisor (hedge fund) and a broker dealer (Helix Investment Partners LLC and Helix Trading LLC). In addition to being CCO and CAO of Helix, he headed the production and sale of a corporate bond research product and also traded equities. Mr. Groves holds the Series 24, 4, 7, 55, 63 and 65 designations. Mr. Groves has a Bachelor of Science from California State University, Fullerton and performed graduate studies at Pepperdine University.
Q: When a small advisory shop, registered with the SEC or a state, specializes in retirement plans and provides non-discretionary advisory services to the sponsor, are the assets viewed as “under management.”
According to the SEC, assets under management include securities portfolios that receive continuous and regular supervisory or management services. The criteria for continuous and regular supervisor services are: (1) Having discretionary authority over and providing ongoing supervisory or management services to the account. (2) Not having discretionary authority, but assuming the responsibility for providing recommendations for the selection of specific securities or other investments, if such recommendations are accepted. In considering the above, the following factors would be considered: Terms of the Advisor Contract: A contract stating that ongoing management services will be provided. Other contract provisions along with actual practices may, however, suggest otherwise. Form of Compensation: If compensation is based on the average value of the assets managed over a specified time period, it suggests that continuous and regular supervisory or management services are provided. If compensation is based on time spent with a client during a visit or paid a retainer based on a percentage of assets covered by a financial plan, it would suggest that continuous and regular supervisory or management services are not provided. Management Practices: The extent to which assets are actively managed or advice is provided. Infrequent activity does not mean services are not continuous and regular. In summary, the situation would determine the answer. The assets could be counted, even in a non-discretionary account, if the services provided were continuous and regular. |
Q: We are a small firm. Is there an exemption from SEC regulation for firms our size? If not, which rules are applicable to our firm?
The short answer is no. Investment advisors with more than $25 million in assets under management are required to register with the SEC. Once registered, they are required to establish effective policies and procedures to monitor and test the operational compliance of their firm. Just as a lack of knowledge is not a good defense for a traffic ticket, the same holds true for investment advisors and SEC rules. Furthermore, the firm’s “inability” to commit adequate resources to compliance is not a defense for failing to meet current standards. Once registered with the SEC, the advisor is subject to all applicable regulations as determined by their business units. The key to having an effective compliance program within a small firm’s budget is to have a clear understanding of the applicable rules and required documentation. Small firms must also allocate their human resources judiciously and use outside help to fill in any knowledge gaps. For advisors that are state registered, i.e., less than $25 million under management, the rules are very similar. Most states have accepted SEC rules as their de-facto compliance system as well. However, there are certain places where the requirements are less stringent depending on the state of registration. |
