ORLANDO, Fla. – Cybersecurity, conflicts of interest, elder abuse -- there are a number of regulatory red flags that all advisors must pay attention to.

But not all compliance issues are created equal. RIAs and advisors with broker-dealers also face hurdles specific to their businesses when it comes to staying out of hot water and keeping regulators happy.


For RIAs, "The SEC has ramped up their examinations but also the aggressiveness of their examinations," says Paul Foley, partner at law firm Kilpatrick Townsend & Stockton, speaking to a crowd of advisors at Pershing's Insite 2015 conference here.

In particular, regulators are focused now on "the mom and pop shops," serving retail investors Foley adds.

According to Foley, here are some of the most important regulatory and compliance issues that RIA firms should be paying attention to:

Performance advertising. "Performance advertising is probably the lowest hanging fruit for a regulator," says Foley. "One thing you should always do is consult a legal advisor if you're not familiar with the rules."

Many RIAs are tempted to advertise their portfolio performance to attract prospective clients, but that's generally against SEC regulations. Foley says in most cases firms can't talk about past performance or publically disclose how they made money for their clients.

Internal blind spots. RIAs should not wait until the SEC calls to prepare their firm for an exam. Instead, Foley suggests hiring a consultant to come in and do a mock version of the exam – even if it offends staff members who are dedicated to the process. Many of these staff members will have "blind spots" because they are so close to the system that they created or work in every day, he warns.

Cooperate and move regulators along. "I don't think it's possible to be completely compliant," says Foley. There are some rules that contradict one another making it impossible to follow both simultaneously, he argues.

Therefore, he encourages advisors to disclose all information, make their fee structure clear and keep records on everything. "[SEC examiners] get paid to find deficiencies," he says. "Cooperate with them, develop a rapport with them and provide them with everything they ask for. And try to get them on to the next advisor."


B-Ds on the other hand, have different hot-button issues that regulators are eyeing. Here are some key areas to focus on, according to Michael Solomon, a FINRA senior vice president, who spoke at a session on B-D regulatory matters:

Lack of oversight. One of the biggest issues in the B-D space is lack of oversight from supervisors, says Solomon, who is a senior regional director of New York, New Jersey, Boston and Philadelphia for the regulator.

"What we see is superficial oversight of the brokers trading in equities where there are high [expense] ratios," he says. "And most of the customers are categorized as high-net-worth."

Solomon calls on managers and back office staff members to ensure that brokers are not trading excessively or intentionally failing to disclose information to investors. Supervisors should look at investments and question the motive. "Does this investment make sense for this investor given the customer's age?" he asks.

Consolidated statements. Another concern for B-Ds is the way in which consolidated statements are crafted, warns Solomon, who says that at least once a month he deals with an issue associated with these documents.

"They're requested by customers, to have all their assets in one place," he says. "But there are a great deal of pitfalls."

If any information is incorrect on the statement, regulators may view the miscalculation as disguised theft. This is a frequent occurrence, he says, given how much information is in a consolidated statement. 

High risk brokers. Solomon's final warning to B-Ds: FINRA is watching. Or at least the regulator is watching those who are deemed to be "risky."

These risky brokers, according to Solomon, are individuals who have failed exams, worked at firms with poor reputations, made many moves in their careers, have numerous customers complaints and have bankruptcies in their past.

"We all have limited resources," he says. "We're better off spending time looking into people who are risky."

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