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The responsibilities of the compliance departments in most financial advisory firms seem to be growing almost at pace with the stock market. The issues and regulatory hurdles that most financial advisors have to deal with have grown exponentially since the market collapsed in the 2009 crisis.
To put things into perspective, a report published last year by the ACA Compliance Group, Investment Adviser Association, and Old Mutual Asset Management shows what the average compliance officer is most worried about going forward into the new year.
Here's a brief list of their top concerns for 2015.
1. Social Media Policy
Over the past decade communication has changed so drastically that it’s evident to anyone paying attention there's no going back. Online communications have undergone a paradigm shift and a lot of people fail to fully grasp how public their thoughts and opinions now are.
Financial advisors are taking advantage of the new means of communication for marketing purposes, but doing so without a set social media policy is a mistake. The compliance departments in most firms are focused on explaining to employees how they must not share anything on social media they wouldn't share in public. 23% of respondents in the survey said that social media policy was one of their major concerns.
2. Fair Valuation Procedures
Financial advisors often find themselves dealing with a client’s need for a certain illiquid or an otherwise hard to value asset. The valuation models and procedures used for such illiquid investments can prove to be troublesome when it comes to compliance with local regulations. This has been another major concern for financial advisors going into 2015.
18% of financial advisors were concerned with the valuation procedures of their firm in terms of compliance with industry regulations. Some firms have even formed valuation committees to approve all valuations and projections developed by their employees.
3. Custody
Advisors are often held responsible for the safe keeping of client assets. It’s their duty to ensure measures have been taken to prevent the misappropriation of assets. The number of employees who are allowed access to client specific details and assets must be kept extremely limited.
The client should also be made aware of the custody policy if entrusted with the assets. Issues surrounding proxy voting policies and procedures have also grown over recent years. Custody has been a major cause for concern in terms of compliance for financial advisors.
4. Cybersecurity/Privacy/Identity Theft
The survey conducted by the ACA Compliance Group, Investment Adviser Association, and Old Mutual Asset Management shows that 75% of respondents believe cyber security is a major concern for the finance sector. Experts have pointed out that the security infrastructure at most financial firms is relatively weak and at risk of an attack. Investing in security systems and training employees to follow data protection procedures is a must for almost all companies in today's world.
In light of some very recent and very high-profile hacks, financial advisors must consider cyber security the single biggest compliance concern they may have to deal with in 2015.
5. Advertising & Marketing
27% of respondents of the survey cited advertising and marketing as major “hot topics” in terms of the compliance issues they must deal with. Setting a policy for ethical marketing and responsible advertising is a must for financial advisors in the current economic climate.
6. Fraud Prevention
Another major concern for financial advisors has been fraud prevention. Every financial firm comes under attack by identity thieves and fraudsters ranging from the casual to the sophisticated criminals. Implementing airtight security measures and firm policy is the key to reducing fraud. But as the attempts get more complex, the problem continues to be a deeply relevant issue.
7. Regulatory Reporting
Reporting standards have become extremely stringent since the financial meltdown of 2008-2009. Financial advisors are concerned with the time and effort, not to mention costs, involved in staying up to date with the regulatory requirements and fulfilling them in an appropriate manner. Financial advisors must make efforts to implement effective reporting policies and ensure that their clients understand them too.
8. FATCA
The Foreign Account Tax Compliance Act or FATCA has been a hot topic for compliance since it was passed in 2010. The act is concerned with U.S. citizens who operate accounts abroad. The regulation also compels foreign financial institutions to report on the assets held by Americans in their custody. The federal government intends to crack down on assets held by US citizens in offshore bank accounts and shell corporations. The compliance issues it creates for clients of financial advisors with assets abroad are innumerable.
Other issues such as whistleblowing and directed brokerage have also been mentioned as areas that need the attention of the compliance teams working at financial advisory firms.
About the Author: Andrew May is a finance attorney who specializes in regulation compliance and FINRA rule 1017. As the founder of May Law, a commercial and financial firm in Chicago, Andrew has worked with everyone from individual investors to Fortune 500 firms. He also frequently shares his expertise and advice through contributions to business and finance publications. To learn more, head to www.MaylawPC.net.
