Episode 11 – Year-End Compliance Considerations for Investment Advisors

Intro (00:00):

This is Advisor Intelligence, the podcast for investment advisors and financial institutions. In each episode, attorneys from your investment management and securities team break down compliance, regulation, and risk into practical insights that help you stay exam ready and ahead of what’s next. This podcast is brought to you by Stark & Stark.

Joseph Antonakakis, Esq. (00:25):

Hello and welcome back to Advisor Intelligence. My name is Joseph Antonakakis. I’m joined today by Jeffrey Lang and Steve Galletto. And you’re probably listening or watching this podcast towards the end of the year, and you’re probably wondering what are my compliance obligations in the end of the third quarter, beginning of the fourth quarter? And that’s what we’re going to talk about today, the types of things you need to do to round out the year, to make sure your compliance program is buttoned up in advance of the new year. And Jeff, I think you had a really good outline before we started the show, if you wouldn’t mind sharing that.

Jeffrey Lang, Esq. (01:04):

Yeah, sure thing, Joe. So to keep it simple, I’m going to put this in terms of three buckets and then we’ll discuss this in terms of each bucket in a moment. Think about it at the year end, annual compliance meeting, making sure we’re having our annual educational meeting. Also, the annual checking that makes sure that we have all of our acknowledgements in place. Some of those certifications that we should be collecting during the year, maybe we missed a few, maybe we want to make sure we have that buttoned up. And lastly, the annual review and risk assessment. Very important to make sure that we complete our annual review of our policies and procedures and document that in writing.

Stephen Galletto, Esq. (01:47):

You sound really excited about the annual review and risk assessment.

Jeffrey Lang, Esq. (01:49):

I get very excited about the annual review and risk assessment because that’s a great opportunity to surface and figure out a lot of things that we might have moved past during the year. Different problems that we might have put to the side and things that we need to think about. The annual review is a great time to bring it all together and make sure we’re addressing any of our outstanding items.

Stephen Galletto, Esq. (02:12):

Honestly, I find that in the heat of the moment when a firm’s going through an actual material issue throughout the year, they forget the impact that that material change or that material deviation has on the firm’s risk profile, on the firm’s policies and procedures, and they don’t spend the time as they’re going through that major change because it takes a lot of time and resources and energy to move the firm from one point to another, especially if you’re dealing with an ownership change or launching a new product or something along those lines. The annual review and risk assessment, again, Jeff, to your point, it’s an excellent point, gives you an opportunity to sit down, take it all in, figure out what we need to pivot to from a compliance perspective to make sure that we stay above board.

Jeffrey Lang, Esq. (02:58):

That’s right. And just to pivot off of one of the things you were just saying, it can be something that we are building during the year. So as we are doing various testing throughout the year or we’re addressing various matters like Steve was just suggesting, that’s when we can be saying, okay, that’s going to roll up into that annual review. So maybe now if I’ve got a collection of items that I know I’ve already addressed, I’ve kind of documented, testing I’ve already done, I’ve got things that I’m just kind of putting together rather than doing a last minute scramble from square one. So that’s a great point. We could be working on this or assembling it throughout the year for a final year wrap up that’s a little easier to do.

Joseph Antonakakis, Esq. (03:44):

Yeah, that’s exactly right. I think what people often forget is it’s critically important to do that annual review, like you guys said, to identify any potential deficiencies or lapses in compliance procedures. And the reason why is because if you miss it, let’s say it’s a quarterly task. If you miss it one quarter, it starts out as a snowball. You miss it two quarters, snowball gets bigger, three quarters, four quarters, and you potentially get to a point where you maybe miss it at the end of the year as well because maybe you didn’t perform your annual review and risk assessment and that snowball gets bigger and bigger and bigger. And we’ve seen cases, it happens, nobody’s perfect as Hannah Montana says, but we’ve seen…

(04:28):

Anyway, we’ve seen instances where certain tasks get snowballed so large that a firm has to come to us and say, “We need help performing a year’s worth or two years worth of compliance tasks that fell by the wayside.” And that’s what we’re here for, right? I mean, no judgment, it happens to the best of us. Things fall to the wayside sometimes, especially compliance because first and foremost, RIAs need to ensure that they manage their client’s money in accordance with their client’s best interests and their fiduciary duty, but compliance is an important aspect of that as well. So that annual review and risk assessment, like you’ve both accurately identified, helps you identify those lapses before they snowball and turn into an avalanche potentially a year or two years or

Stephen Galletto, Esq. (05:17):

So down the line. Regulatory issue, right? That’s right.

Jeffrey Lang, Esq. (05:21):

And you raise a good point in that, so we’re talking about that testing, we’re talking about some of that quarterly testing, some of those things that go on during the year, and part of that is certifications. So one of the key certifications and one of the key certifications that you want to get is that everybody has received their compliance manual. Now, technically speaking, you want to be able to reflect that you have received the firm’s code of ethics. Most firms, including those on our policy procedure manual, have that wrapped up in the compliance manual. So that’s two birds with one stone, but you want to be ensuring that you are collecting these certifications. Think has everybody received their compliance manual and code of ethics and certified it? Has everybody certified the privacy policy? Has everybody certified on their use of email and social media? So thinking in terms of all these certifications, you want to make sure that you are collecting.

Joseph Antonakakis, Esq. (06:22):

A good time to do that too, Jeff, is at the time that the firm performs their annual update of their policies and procedures manual. And it’s easy to remember because you’re already in policies and procedures mode at that point, at whatever point of the year it may be. And then directly after you update it, you can get that to your employees, particularly your IARs and have them sign off and say, yes, I’ve reviewed this.

Jeffrey Lang, Esq. (06:46):

That’s right. Another great way to handle it, I agree with that. Another great way to handle it is when you are doing your annual compliance meeting and you have all of your staff assembled, most people do it over breakfast or lunch, so I see. So you’re going through that annual compliance meeting process where you’re covering all of these topics and you are sending around perhaps a virtual sign-in sheet or just collecting information or documenting information on who attended the meeting. When you’ve got everybody in the room, you’ve got everybody thinking about compliance, that’s usually a great time to also say, “Hey, by the way, when you’re all signing off that you attended this, I’m also going to circulate your compliance manual receipt or your email policy.” Collecting all these other things while you’ve got everybody assembled and while everybody’s thinking about compliance at that moment.

Joseph Antonakakis, Esq. (07:41):

Can I take a half a step back for a second and can we define what the annual compliance meeting is? Because we know obviously because we do a couple of these a week for our clients where we run and lead the annual compliance meeting, but can you maybe, Steve, take a moment and describe the purpose of the annual compliance meeting?

Stephen Galletto, Esq. (08:00):

Sure.

Joseph Antonakakis, Esq. (08:02):

Yeah.

Stephen Galletto, Esq. (08:03):

So the annual compliance meeting primary purpose is to make sure that everyone that is subject to the firm’s policies and procedures gets more or less a refresher, right? These are important areas where you need to be paying attention from a compliance standpoint. And when I conduct these meetings, really the takeaway is always, if you’re not sure, ask your chief compliance officer, right? You can use the policies and procedures manual as a reference point, but if it isn’t abundantly clear based upon how things are stated and laid out in the policies and procedures manual, get your prior approval from the chief compliance officer so that no one’s sorry about it later.

Joseph Antonakakis, Esq. (08:45):

Yeah. And the other thing, if you don’t mind me interrupting for just a moment, the other thing I like to tell people, because they often forget, is that the policies and procedures manual is like the firm’s compliance constitution. If there’s any question, if you’re an investment advisor representative listening or watching to this podcast, the first place you should probably go to find an answer to a compliance related question in my view is your policies and procedures manual, especially if you’re on our form, which of course changes depending on the firm, nine times out of 10, you’re going to find a robust starting point to an answer within the policies and procedures manual.

Stephen Galletto, Esq. (09:26):

You’ll understand what the actual concern is, right? Why does the firm have to take a position on a particular situation? Why is the firm collecting information about your political contributions in state and local type elections? Why is that important? It’s because there’s a pay to play regulation out there and if for whatever reason we run a file of the pay to play regulation, you’re in trouble as the investment advisor and the investment advisory firm’s in trouble if we’re receiving fees for a client that was referred to us by a politically sensitive candidate or person. There’s always a rhyme and there’s always a reason for everything that we do compliance wise, right? The policies and procedures manual lays out the reasoning and the understanding. And if you want to deviate from the policies and procedures or if you want clarification on the policies and procedures, that’s where the chief compliance officer comes in.

Jeffrey Lang, Esq. (10:21):

And one of the things I always mention during my annual compliance talks is the policy and procedure is a living, breathing document. And when it’s distributed to members of the firm, to each of the supervised persons, staff members of the firm, the thing that you want to do is make sure that first each person is reviewing the manual. As we said before, they’re signing off on the manual. But if you play a particular role in the firm, say you’re a marketing person, say you’re a portfolio manager, and there’s parts of the manual that are very particular to your job responsibilities, pay very close attention to those. You want to make sure that the manual expresses how you do what you do appropriately. So if you’re in the best position to know whether the language in the manual is accurate to how you do things, speak up.

(11:18):

The manual can be adjusted. It can be revised to adapt to how the firm does the things that it does, but it’s very important to make sure that the manual is adapted to the firm’s processes.

Stephen Galletto, Esq. (11:33):

Another thing I want investment advisors to do more frequently than what I see in actual practice is making sure the OBA forms for their investment advisor reps go to the investment advisor reps at least once a year. Honestly, quarterly would be better, but at the very least once a year. And also supply a copy of their form U4. Very often I run into issues where a form U4 is outdated in stale. Somebody picked up and moved or they now have a secondary residence. Somebody’s been working from home in a different state and it creates an issue because the firm either wasn’t notice filed in that additional state or the individual wasn’t U4 in that additional state. Having the advisor review their form U4, which of course they are responsible for, right? They’re the ones signing off on the fact that the form U4 is accurate and up to date, very often gets missed.

(12:33):

I think that needs to be part of this annual to-do list as well.

Joseph Antonakakis, Esq. (12:37):

For sure. Can we talk for a moment as well about the distinction between the policies and procedures manual and what some firms refer to as desk policies?

Intro (12:48):

Certainly.

Joseph Antonakakis, Esq. (12:48):

Because I’ve seen instances like this come up during exams where the regulators may take a look at somebody’s policies and procedures manual and say, “Well, this accurately recites what the rules are on this, but what are your procedures on…” I’ll give you an example. The policies and procedures manual generally should outline the regulatory requirements as it relates to review of marketing and advertising material. And oftentimes it gets into testimonials, endorsements, third party ratings, rankings and awards, prohibited statements, avoiding materially misleading statements, the varying prohibitions within the marketing rule and so on and so forth. But they might not always, within the policies and procedures manual, outline –

Stephen Galletto, Esq. (13:35):

The 35 steps as to how to place a trade?

Joseph Antonakakis, Esq. (13:38):

Well, I’m staying in the marketing universe for a second. They might not exactly outline who is responsible for reviewing the marketing materials and how do you get it to them. So somebody may write a blog or they may draft a LinkedIn post or they may record a podcast and then the question becomes, well, who do I send this to?

(13:59):

And the firm’s desk policies, not within the policies and procedures manual itself, but the desk policies may outline, okay, if you are drafting a blog or a LinkedIn post or some other type of marketing material, you’re going to upload it to, let’s call it some third party platform where the CCO is able to review that content before it goes out. And that’s something we help a lot of firms with as well, where they’ll give us access to their compliance technology platform and we can go in and review it on their behalf and that’s part of their desk policies. It’s like upload to platform, stark and stark or CCO reviews, and then once it’s approved, it can be published.

Stephen Galletto, Esq. (14:38):

Right. Just to be clear, there is no requirement for a desk policy. For sure. But if the SEC comes in and they say, “Give me all your policies and procedures, including desk policies,” if you have a written process down for this is how we handle certain marketing issues, “This is how we handle certain best execution review situations, this is our process for branch office review.” If you have a separate policy for that, separate how to do and here’s a checkbox type form, the SEC can and will ask and you should provide that as part of the SEC’s review and examination of your firm.

Jeffrey Lang, Esq. (15:17):

Right. And it does pop up a lot as you were talking about in the world of operational procedures. Two classic examples where I see… And there’s obviously more examples, but fee deduction’s another one, Joe. A lot of times the manual will just indicate, “Hey, we can charge fees. We charge fees based upon assets under management.” But it might be the desk procedure separate from the manual that then gets into the nitty-gritty of what are we doing to charge that fee? What buttons do we press? What systems do we use? How do we test it? How do we track it? So that’s another example. Rebalancing is one I see a lot where people have a robust side procedure because they’re going in saying, “Okay, at what point in my guardrails in my portfolios is something triggered where I have to undertake a rebalance and what are the steps that I go through to do my trading and do my rebalancing?” So if we have this sort of off ramp into a separate procedure that has its own set of steps to undertake it and to get the process done, that’s where we really want to be thinking about these desk procedures.

Joseph Antonakakis, Esq. (16:25):

So there are a couple other things that firms need to do at the end of the year as well, starting with 13Fs.

Stephen Galletto, Esq. (16:32):

Right. So if you’re a 13F filer, obviously fourth quarter 13F needs to be filed. That isn’t due until February 14th normally, depending upon how the dates fall in the following year. Your third quarter 13F is due obviously towards the end of the year. But for those of you that are not 13F filers, for those of you that have been on the cusp, it’s important for you to look back at the number or the amount of 13F securities you have discretionary authority over during the previous year, right?

Joseph Antonakakis, Esq. (17:10):

Can you run through what those thresholds are, what the three, the tri-part analysis is?

Stephen Galletto, Esq. (17:16):

Sure. So if you’re not a current 13F filer, you may need to become a 13F filer if you have over 100 million in assets under management on a discretionary basis that are 13F securities. And what are 13F securities? Ha, beat you to your question, Joe. Yep,

Joseph Antonakakis, Esq. (17:34):

There you go.

Stephen Galletto, Esq. (17:35):

So 13F securities are going to be individual equities. They’re going to be ETFs, almost never mutual funds. There’s a 13F securities list that gets published by the SEC on an ongoing basis. It’s not an annual thing. It’s an ongoing thing. You should always be reviewing that 13F securities list when determining whether or not you are above that hundred million threshold or not. The

Joseph Antonakakis, Esq. (17:57):

Reason we bring that up at the end of the year is because if you are not a 13F filer, like you said, if you cross that threshold –

Stephen Galletto, Esq. (18:05):

During this year.

Joseph Antonakakis, Esq. (18:06):

Let’s call it 2026. You cross that threshold during 2026, whether it’s in January 2026 or December 2026, your initial 13F filing is?

Stephen Galletto, Esq. (18:16):

The fourth quarter of 2026.

Joseph Antonakakis, Esq. (18:19):

Correct. But it’s filed February 14th.

Stephen Galletto, Esq. (18:22):

Of 2027. Of

Joseph Antonakakis, Esq. (18:23):

2027. It’s filed before

Stephen Galletto, Esq. (18:24):

February 14th,

Joseph Antonakakis, Esq. (18:25):

2027.

Stephen Galletto, Esq. (18:25):

Correct.

Joseph Antonakakis, Esq. (18:26):

Prior to February

Stephen Galletto, Esq. (18:27):

14th. So if you’re not a 13F filer, but you think you might have more than 100 million in assets under management that qualify 13F securities, and you’re managing those assets on a discretionary basis, it’s important for you to review. If you’re using tools like Tamarack or Black Diamond or Orion, they very well might be able to parse through your securities, and I’m saying they very well may be able to, but I’m pretty certain that they will, parse through your securities and your positions and determine whether or not you’re above that threshold or not.

Joseph Antonakakis, Esq. (18:59):

I’ve actually seen instances where the broker dealer will notify the firm that they’ve crossed the threshold, whether it’s a 13F or a 13H or a 13G, for example. It’s

Stephen Galletto, Esq. (19:09):

Usually a 13H, that large trader where… And again, we can get into the nitty gritty of the 13H, but that notification is largely because the 13H gives you a large trader identification number and that identification number gets reported to the custodian. The custodian has an actual reporting requirement. That’s why they’re telling you. They likely won’t tell you a thing about the 13F. Happens all the time where folks don’t have an understanding as to whether or not they cross that threshold. It’s not a single position where you have discretionary authority over 100 million or more of a 13F security.You could have a million 13F securities, right? One share of a million 13F securities. If that value is over 100 million, and obviously it would be, you need to be a 13F filer. It’s in the aggregate. It’s not a single position.

Joseph Antonakakis, Esq. (19:59):

Yeah, that’s where I see people get tripped up sometimes as well. The other thing we can talk about, which I think is really important at the end of the year, is vendor due diligence.

Jeffrey Lang, Esq. (20:08):

Right. So vendor due diligence, think about it, vendor due diligence for each of your providers. It could be your technology providers like your Orion or Pontera or whatever technologies you use. It can also apply to sub-advisors and third party managers or even the custodians that you use.

Joseph Antonakakis, Esq. (20:30):

Or even the professionals that you use, maybe a law firm, for example.

Jeffrey Lang, Esq. (20:34):

Right. Even a law firm. So you’re doing this due diligence. So everyone’s thinking, “Well, I’ve already done my due diligence. I have a due diligence folder right now.” The key is making sure that at least on an annual basis, we’re refreshing that information. Has the vendor put out new information that we want to have on file? Has there been any issues presented with the vendor that would update our information and might come to question whether or not we can continue to do business with them if there was some kind of severe event? But the main thing is we want to make sure that we are looking to make sure that the information that we have currently either remains current, or if it’s been updated in some manner, that we’re getting that updated refreshed material for our vendor due diligence folders. And we have found that in exam settings, this information is very, very actively reviewed.

Joseph Antonakakis, Esq. (21:30):

Can I just mention another thing as it relates to vendor due diligence, and it’s something that people often forget, the review and due diligence on third party unaffiliated professionals to whom the firm may refer their clients. I’ll give you an example. I’m an RIA and Steve is my client and Steve needs an estate planning attorney referral. I may have some sort of relationship, professional relationship, of course, with Jeff whereby I can refer him an estate planning client, and because Steve needs estate planning assistance, I can refer Steve to Jeff. And what people often forget is I, as the RIA, should be performing annual due diligence on people like Jeff, on estate planning attorneys, on CPAs,

Jeffrey Lang, Esq. (22:20):

Other

Joseph Antonakakis, Esq. (22:23):

Unaffiliated third party professionals. And promoters,

Jeffrey Lang, Esq. (22:24):

If I use promoters.

Joseph Antonakakis, Esq. (22:25):

Promoters as well. Absolutely. What does due diligence look like for those types of entities?

Jeffrey Lang, Esq. (22:31):

Well, you’re basically looking to make sure that, number one, if it’s the type of entity, say like an attorney or in certain cases a promoter, if they are required to be licensed or registered, maybe it’s an attorney license, maybe you’re using a promoter who needs to be investment advisor rep licensed. Do they maintain all of the licenses and certifications that would allow them to continue to serve in that role? That’s the first thing. The other thing I would be checking on is, is their business continuing to be an up and running and going concern? And if I do a basic background check on them, if I’m doing a Google check, am I seeing any complaints? Am I seeing any legal actions? Have they been involved in any public litigation –

Joseph Antonakakis, Esq. (23:20):

Or disciplinary

Jeffrey Lang, Esq. (23:20):

Issues. Or disciplinary items. So I’m looking at the baseline. Do they continue to be in good order from a doing business standpoint and assuming that they are, has there been any nutty information out there regarding them that would give us pause to refer future business to them?

Joseph Antonakakis, Esq. (23:38):

Can I ask you a question about that? Why would an RIA need to perform that due diligence on the unaffiliated service provider?

Jeffrey Lang, Esq. (23:47):

Basically because if something goes wrong between the client and that service provider, one of the things the client might do is say, “Well, you know what? He led me astray. I had problems with him, but you’re the one who sent me there, so I am blaming you as well.”

Stephen Galletto, Esq. (24:04):

Then you as the investment advisor also have a fiduciary duty to the client as well. Whether you’re getting paid for that referral or not, or that recommendation or not, you need to believe that the professional that you’re referring your client to is suitable, right? Is appropriate for your client, right? If you don’t do that due diligence, you can’t justify your reasonable belief that you were recommending a professional that could meet the client’s need.

Joseph Antonakakis, Esq. (24:30):

Yeah, that’s exactly right. The final thing that I would touch on for the firm’s end of year wrap up is as it relates to their renewals, and that goes for both their investment advisor representatives, that goes for their firm to ensure that they are notice filed everywhere they need to be notice filed. The other thing that now is spreading across the nation, we have about half of the jurisdictions in the country that have implemented investment advisor representative continuing education requirements, making sure that all IARs, and I’ll make an important note here, the requirement follows the state of registration of the investment advisor representative themselves, not of the firm. So if you have an IAR, let’s say you’re a firm in Pennsylvania and you’ve got somebody in IAR who is registered as a rep in Pennsylvania and New Jersey, they are subject to New Jersey’s IARCE requirements and they would need to complete that 12 credits a year.

(25:35):

If they don’t complete 12 credits a year, let’s say they miss it two years in a row, they are potentially at risk of de-registration. And just a little plug for Stark and Stark, we do annual investment advisor representative continuing education seminars and sessions. Some of them are full day in-person seminars, remote webinars and the like where people can at least complete some of most of their investment advisor representative credits. But again, if you’re listening to this at the end of the third quarter, beginning of the fourth quarter of the year, just make sure you are completing those requirements. And if you’re a firm, make sure you’re completing your renewals as well.

Stephen Galletto, Esq. (26:20):

Right. Same thing goes for CFP credits, CFA credits, everything, every designation, including those as well as being a registered investment advisor rep in a state that requires continued education, make sure you stay on top of that. By the way, if you fail to meet the threshold and you do get deregistered, you have to make up those credits that you missed before you can then get back on course, get re-registered and then get back on track with the continued education.

Joseph Antonakakis, Esq. (26:48):

What’s the rule on that? Because fortunately, I have not witnessed that yet. Do you guys know if somebody gets de-registered, they don’t have to retake a Series 65 or anything, right? They just have to complete their back –

Stephen Galletto, Esq. (26:58):

Well, the Series 65 will stay current for, what is it, five years?

Jeffrey Lang, Esq. (27:05):

I think less.

Stephen Galletto, Esq. (27:06):

I thought

Jeffrey Lang, Esq. (27:06):

It was two years.

Stephen Galletto, Esq. (27:07):

Two years. Yeah. Let’s go back and strike that. Strike that.

(27:12):

So the Series 65 will stay current for a period of two years from the last date in which they were registered. If for whatever reason they get de-registered and they just ignore the deregistration for two years, then yeah, they certainly have to take the Series 65. But in all likelihood, they wouldn’t require you to take the Series 65 if you were de-registered as a result of your contingent education credits falling behind. However, caveat, if you were exempt from taking the Series 65 based upon a waiver, and you failed to meet the continued education requirements, when you reapply, when you file your form U4 again, you’re either going to be asking for that waiver and they’re probably not going to be super inclined to give it to you because you ignored your continued education requirements, or two, they’re just going to force you to take that Series 65.

Joseph Antonakakis, Esq. (28:00):

Yeah, exactly right. Well, Steve and Jeff, thank you so much for your time today. I’m glad we had a conversation about what the end of the year looks like for investment advisors now that we are nearing the end of the year in our first season of Advisor Intelligence. I’m looking forward to having the next conversation with you as well. Thanks so much for watching and listening. Thank you. Have a good one.

Intro (28:31):

The Advisor Intelligence Podcast provides general information and commentary only. The content is not legal advice, nor does it create an attorney-client relationship. For more information about Stark & Stark services, please visit our website at stark-stark.com.