Simple, Practical Ways Advisors Can Boost SEC Compliance

If someone complies with SEC laws and regulations, that person establishes a legitimate and durable financial advisory business.

Advisors must deal with complex and fast-changing laws, regulations, SEC enforcement priorities, and investor expectations.

When advisors develop and maintain compliance programs that accord with the relevant laws and regulations, advisors can improve their firm’s credibility and sustainability.

This article outlines important and actionable steps advisors can take to strengthen SEC compliance, focusing on building a robust foundation for regulatory adherence and risk mitigation.

Understanding SEC Compliance Obligations

Financial advisors registered with the SEC fall under the Investment Advisers Act of 1940, which holds them to a fiduciary standard.

Fiduciary duty requires advisors to act for their clients’ best interest at all times.

Compliance requirements include:

• Registration with the SEC, including submission of Form ADV, which details key information about the firm, such as business structure, assets under management, and fee models.
• Adoption of a written code of ethics that applies to all supervised persons within the firm.
• Implementation of written compliance policies and procedures designed to prevent violations of the Advisers Act.
• Appointment of a Chief Compliance Officer (CCO) responsible for enforcing compliance measures.
• Conducting an annual review of policies to ensure effectiveness and relevance.
• Adherence to anti-money laundering (AML) and know-your-client (KYC) regulations.
• Maintaining accurate and secure records of business communications and transactions.

These obligations serve as guardrails to ensure that advisors maintain transparency and act ethically in serving clients.

Key Elements for Strengthening SEC Compliance Programs

For advisors implementing a strong compliance program, these elements should be part of the foundation:

Develop Comprehensive Policies and Procedures

Clear, detailed written policies form the backbone of a strong compliance program.

These should address:

• Procedures to detect, prevent, and correct violations.
• Controls for personal trading and outside business activities.
• Handling of client disputes and complaints.
• Security and privacy safeguards for client information.
• Business continuity planning to mitigate operational risks.

Regular updates to these policies ensure the compliance program adapts to new regulatory trends and business practices.

Ensure Effective Oversight and Accountability

A designated Chief Compliance Officer should be hired, who is required to be independent and empowered to develop and enforce compliance policies and practices.

Supervisory control systems should also be implemented to detect employee misconduct and prevent regulatory violations.

Conduct Rigorous Risk Assessments

Periodic reviews of the firm’s business operations, products and services, and clients can identify important regulatory risk areas that compliance programs can then specifically target in order to reduce exposure.

Embrace Technology to Enhance Monitoring

With advanced compliance software and data analytics, a firm can assist an advisor to automate and manage compliance processes such as trade surveillance, transaction reporting, and regulatory filings that would be largely manual, which helps with SEC compliance.

Foster a Culture of Compliance and Ethics

Training of all employees on their regulatory and ethical obligations.

Implementing policies that encourage employees to raise compliance questions and concerns without fear of retaliation, and creating a culture of compliance.

Maintain Transparent Client Communication

Advisors must write marketing materials, client disclosures, and contracts clearly, accurately, and concisely as a safeguard against client complaints or regulatory inquiries for failure to provide full disclosure.

Navigating Emerging Regulatory Challenges

Firms should think about how the use of AI tools can raise or lower compliance risk as technology develops, with the introduction of the tools, and advisors should be clear about the impact these technologies have on decisions and disclosures.

Newer entrants like Luthor.ai, and others learn by machine and act using artificial intelligence for automated document processing, regulated research, and other functions that comply.

These technologies integrate into workflows to manage complex regulations.

Why These Steps Matter

Failing to comply with the SEC’s standards of conduct may result in severe penalties including fines and suspension or bar from the financial services industry, as well as the loss of clients and decades of earned reputation.

Regulatory compliance advisors can build and maintain a business model through implementing policies and procedures, hiring a strong chief compliance officer, utilizing technology, and establishing a compliance culture throughout a business so they meet regulatory standards and client expectations.

Conclusion

Because the regulatory environment demands much of investment advisors, asset managers should develop a strong program to comply and actively manage risk to ensure SEC compliance.

Such strategies help reduce risk in addition to building trust and securing long-term business success.

Most importantly, however, advisors will better meet their fiduciary obligations after they follow these best practices.