IA Compliance:

Compliance for Hire

The following information reflects the views of NASAA’s Investment Adviser Section Resources and Publications Project Group.  It does not necessarily represent the views of NASAA, and it is not intended as legal advice. Any questions should be directed to the appropriate state regulators.

Often the owner of a state registered investment advisory firm must wear many hats:  business development, serving clients, securities monitoring, and analyzing and ensuring compliance in what may seem like a complex regulatory environment. One solution many advisers contemplate is hiring a consultant to assist in navigating the regulatory requirements, with the hope of mitigating the associated legal risk. While this may seem like an easy solution, advisers should not assume that by simply hiring a consultant they are in full compliance with all regulatory requirements. This article will give an overview of steps a firm can take for assessing their compliance needs, finding the right consultant, and recognizing the limits of that consultant’s services.

Assessing Compliance Needs

The first step is establishing what the firm needs. Determining what services the firm would like the consultant to perform, and establishing the scope of work the firm is seeking, will help find the best fit. Services might be one-time, like providing an investment adviser with templates, or ongoing, like regular reviews and audits. For example, some firms use consultants to support them with the initial registration process. Other common consultant activities include assisting with Form ADV filings and amendments, providing templates for advisory contracts and written supervisory procedures, or conducting mock audits and reviews to ensure the firm is following best practices.

Finding the Right Consultant

The investment adviser can search for consultants based on the services they offer. Once a list is compiled of possible consultants, review each consultant’s education, credentials, and work experience. After completing this review, the firm should interview the consultant to gain a more detailed understanding of their services and pricing, and to get additional information on their background. It is important to inquire if the consultant has worked with advisers in the firm’s state, their familiarity with the specific state’s regulatory requirements, and how the consultant stays up to date on different jurisdictional rules and interpretations.

Possibly the most important consideration is whether the consultant’s services are one-size-fits-all or individually tailored to a firm’s specific business model. Is the consultant just providing templates and making themselves available for the firm’s questions, or are they independently evaluating the firm’s practices, tailoring documents, and identifying potential compliance problems? The “fill in the blank” approach coupled with online webinars on compliance topics may not provide enough support for some firms.

Limits of Service

While a firm may decide to hire a consultant to handle certain compliance services, it is important to remember that it remains the firm’s sole obligation to follow state and federal compliance regulations. If an issue arises through a regulatory examination or client complaint, the firm will most likely be the entity held accountable for the issue. While a regulator may take into consideration any advice the firm received in making the decision that led to the violation, it is ultimately the responsibility of the firm to ensure compliance, not the consultant.

With the right planning and communication, hiring a consultant can be a viable tool for some investment adviser firms to navigate the complexities of the regulatory landscape. The firm should view the consultant as a partner in the path to compliance, rather than the sole answer.

For more information about compliance, contact your state securities regulator, or check out the industry resources available for state registered investment advisers from the North American Securities Administrators Association (NASAA) at nasaa.org.