Will Your Compliance Plan Prevent Costly Violations?

Compliance regulations in the financial services industry protect investors and prevent disasters. But even with powerful regulatory agencies like the SEC, IRS and Department of Labor (DOL) closely monitoring the actions and transactions of financial advisors and their firms, mistakes happen.  The 2008 recession happened. Bernie Madoff happened. Every year, even the most reputable and well-intentioned financial firms fail stringent SEC audit requirements and in turn must pay steep penalties and restitution fees. 

Compliance violations can be costly, detrimental to productivity and even cripple career longevity for an advisor. But it’s hard to argue the positive impact regulatory requirements have made on the industry. Without a system of compliance checks and balances, financial services could mirror the wild wild west rather than a sophisticated system of intricate processes and opportunities as it functions today. With the new DOL fiduciary rule becoming finalized in 2017, it’s clear that protecting investors continues to be a high priority for regulators.  

The rule’s expanded and greater standard of fiduciary care will result in even the smallest violations to come under close scrutinization. These small instances of noncompliance can indicate larger, more serious instances of noncompliance, thus the increased scrutiny by regulators.  

But what does that mean for financial services professionals and where should they focus their compliance efforts? Regulators indicated several areas of concern as high priorities, and while a full discussion of all the priorities is beyond the scope of this piece, below are  five areas of critical interest that can result in noncompliance violations: 

1) Cybersecurity

Financial services professionals are in possession of a great deal of confidential client information, and the number of data breaches is rising exponentially. Assess your current situation to determine if you need additional safeguards. The SEC conducts an examination of firms specifically on cybersecurity and firm preparedness.

Hiring outside IT experts or tech consultants to conduct a cybersecurity audit is one way to spot potentially harmful gaps or flaws in your current process. According to PriceWaterhouseCoopers, LLP, financial services firms increased security spending by 14 percent from 2014 to 2015, indicating a heightened awareness that proactively identifying these missing components can prevent a damaging situation for the firm and its clients.

2) Investing for retirement

Another area where regulators have noted increased scrutinization is in 401(k) accounts and company-sponsored retirement plans because of an increased potential for abuse. Make sure you're well versed in rollover rules and can document that all actions are in a client's best interest.

Additionally, ensure your expertise in primary wealth-transfer events such as the transfer of life insurance proceeds, divorce settlements, inheritance, and proceeds from the sale of business assets are above reproach.

3) Municipal advisor registration

Since July 1, 2014, the SEC requires all firms that are engaged or plan to engage in municipal advisory activities to register with the SEC and Municipal Securities Rulemaking Board. In the two years since the rule became final, examinations have found some firms still do not realize their activities subject them to the registration requirements.

If you provide advice to customers who are municipal entities or obligated persons it is recommended you review registration requirements to ensure compliance with the new fiduciary rule.

4) Product suitability

Certain investment products that result in conflicted compensation will require extensive documentation and due diligence to prove the recommendations are suitable and meet the new fiduciary standard.  

Such products include variable annuities, alternative mutual funds, non-traded real estate investment trusts (REITs), floating rate bank loan funds, interest rate-sensitive fixed income securities and exchange-traded products tracking alternatively weighted indices. 

5) Culture of compliance

Establishing and maintaining a strong culture of compliance throughout an entire organization is crucial. Even the strongest compliance department can't make up for an uninvolved or undermining company leader. A culture of compliance starts at the top and is an ongoing effort. Leaders should publicly embrace a robust standard of ethical behavior instead of relegate to a compliance department within the firm. High compliance standards should be well-integrated into all aspects of business, at every level. This last area of focus is of particular importance considering the ongoing nature of regulatory and fiduciary rule compliance.

Now that you're aware of these five critical compliance concerns, don't procrastinate when it comes to implementing changes. The quicker your compliance responsibilities are taken care of, the faster you can just monitor and test to ensure compliance policies and procedures are continually upheld.

Gain expert insights about the new DOL rule and become your clients' trusted retirement income advisor, check out the fact sheet "5 Things You Didn't Know About the DOL Conflict of Interest Rule But Should."