CHARLOTTE, N.C. -- Will you be ready when the SEC comes knocking on your door?
Most firms aren't ready to pass an SEC exam, says Thomas Giachetti, shareholder and chair of the securities practice group at Stark & Stark. And scrutiny by the SEC is only going to get more stringent, he told a room full of advisors at the NAPFA Evolution Now conference this week.
An increased SEC crackdown is a direct result of Federal Reserve chairwoman Janet Yellen's, efforts at "cleaning up Wall Street," Giachetti says. He complimented her on doing a good job at that -- but said the problem for advisors is that Yellen believes that they, too, are "Wall Street."
"You're not Wall Street. You're not the big money centered banks," he says. "You didn't blow the world up in 2008 and 2009 -- but they think you're Wall Street."
The SEC has recruited "really good" examiners and prosecutors, Giachetti says. And many of these new prosecutors are going "straight to testimony" -- meaning they are serious about any infraction.
HOW TO PREPARE
Advisors should now prepare for more thorough exams, Giachetti warns. "What you prepared for three years ago? ... Throw it out," he says. "It's not the same thing."
Here are five questions Giachetti says advisors must focus on as they prepare for an exam:
1. Is your chief compliance officer more than a figurehead?
"[The SEC] wants to know if the CCO has the ability and the authority to discharge his or her responsibilities," Giachetti says.
The CCO has to be treated as a senior member of the firm, he says; that person should be on all committees, except perhaps for ownership if that individual does not have equity in the firm.
The SEC has made it clear that CCOs should "be part of senior management," Giachetti says.
2. Does your firm abuse social media?
Giachetti suggests that firm executives create a social media policy. No business should be discussed via social media -- nor, for that matter, from employees' personal email addresses. "You need to make sure that your employees understand that this is our policy," he says. "At the annual compliance meeting that you must have, make sure it's a line item [to] go over social media."
3. Is your AUM accurate?
"If you're a discretionary manager, your assets count for SEC purposes," Giachetti says.
He warns attendees not to label any assets as "assets under advisement" -- the SEC will look harshly at anything it cannot define.
"You either have assets under management or you don't," he says. "If you can't trade it you can't count it."
4. Do you have cybersecurity protocols in place?
Given the severity of recent cybercrimes -- such as the hacking of JPMorgan Chase and attempts on other financial firms -- the SEC has taken a strong stance on ensuring firms have cybersecurity protocols in place. Advisors need to have a policy in place, Giachetti says, to clients inform clients that they will not transfer money without a verbal conformation.
5. Are you telling the truth?
"Never lie to the government," Giachetti says.
Full disclose is the best course of action, he says -- the SEC will find out any compliance issues anyway.
"Make sure you disclose every conflict you have," he says.
- Advisors: How to Approach a Cybersecurity Policy
- Which Investors Trust Advisors the Most?
- No, Really: You Need Your Own Financial Planner