Compliance Solutions for Investment Advisers

Compliance Alert! Special Concerns

Dear Compliance Professional,

The Compliance Alert below was originally sent out in 2008. Unfortunately, recent market events make the subject matter relevant once again. We will also be sending out other pertinent Compliance Alerts from 2008-2009.

Background

The purpose of this compliance training material is to alert advisory personnel to special compliance considerations that may arise as the result of the recent market turmoil. The decline in asset values combined with the loss of clients has led to a significant reduction in asset-based fees.  The resulting stress placed on advisory firms and their personnel creates a number of compliance challenges.  Primary among these are (i) ensuring that revenue loss does not translate into inappropriate, illegal or desperate measures; (ii) managing exposure to increased client and regulatory scrutiny; and (iii) understanding whether current compliance policies and procedures are sufficient to meet the demands of a rapidly changing investment environment.

High-Risk Communications

Recent efforts to maximize client retention have included special letters and blast email sent to clients. Advisers have also been actively reaching out to clients via telephone. The Chief Compliance Officer should review, approve and monitor all broad-based communications. Red flags include: (i) promises (stated or implied) of better times ahead; (ii) mischaracterization of the severity of current market issues; (iii) changes in the manner in which performance is calculated; (iv) changes in benchmarks used for comparison purposes; and (v) changes in accounts included or excluded from composites. Remember that any communication sent to more than one person is considered advertising and should contain all proper disclosures and disclaimers.

Complaints

Unprecedented market conditions equals an increase in client complaints.  All advisory personnel should be instructed to immediately inform the Chief Compliance Officer of any client accusations involving violations of portfolio guidelines, misrepresentations or other non-standard complaints.

Increased Scrutiny

Clients rarely complain about violations to investment guidelines when returns are strong. Accusations of wrongdoing increase during times of precipitous market declines. With the decrease in client portfolios comes increased scrutiny of representations and disclosures made in Form ADV, private offering documents; and marketing materials. All such documents should be reviewed to determine whether disclosures are still accurate, whether representations are still being adhered to and whether a drift away from agreed upon investment guidelines has occurred. In addition, compliance policies and procedures should be reviewed to ensure they are adequate to meet current challenge.

 

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