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The SEC Isn’t a Goldfish; Examiners Will Remember Your Compliance Problems

May 3, 2022
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By Les Abromovitz, Senior Director

In the hit series, Ted Lasso, an American football coach becomes the coach of a British football team, better known to Americans as soccer. Ted consoles a member of his team who made a bad play by saying, “You know who the happiest animal in the world is? A goldfish. You know why? It’s got a 10-second memory.” He urges the despondent player, “Be a goldfish.”

While that’s great advice to friends and colleagues who are down on themselves after making a mistake, you should not expect SEC examiners to have the memory of a goldfish. Your prior compliance mistakes may come back to haunt you.

Risk-based examinations are based in part on past compliance problems

The SEC’s examination program is risk-based. The SEC utilizes data and intelligence from its examinations, as well as from regulatory filings, to identify registrants that appear to have elevated risk profiles. In addition, firms that floundered during prior compliance examinations are likely to be viewed as higher risk.

The SEC will also use its analytic capabilities to identify individuals with a track record of misconduct and may decide to examine the firms that employ them. They are likely to evaluate the compliance oversight and controls of Registered Investment Advisors (“RIAs”) that employ advisory personnel with a disciplinary history.

Examiners won’t forget prior compliance deficiencies

A poor showing on a prior regulatory examination may cause examiners to circle back sooner than normal for a second look at an RIA’s compliance program. When examiners identify problems during an examination, the RIA typically receives a deficiency letter. RIAs should promptly correct the compliance problems identified. They should also revise their policies and procedures to ensure that these deficiencies do not occur again.

During follow-up examinations, examiners will remember those prior deficiencies or will have prior findings in hand to jog their memory. The failure to correct these prior compliance errors is likely to be viewed by examiners as a recidivist violation and may lead to an enforcement action against the RIA. Willful violations will be treated much more harshly than innocent or careless mistakes made by Chief Compliance Officers (“CCOs”) and their firms. Stiff fines and other sanctions are much more likely where a firm has committed recidivist violations.

Once an RIA has committed serious compliance violations, the SEC is likely to schedule more frequent examinations of the firm. The RIA’s compliance program may be under the microscope for a long time.

It is not just SEC examiners who have long memories. The Internet has an infinitely long memory. When the SEC brings an enforcement action against an RIA or an Investment Advisor Representative, the negative publicity is likely to follow the firm for a very long time.

Conclusion

Investment advisors should not be a goldfish when it comes to compliance. Every year, the SEC publishes its annual priorities, and RIAs should make sure they are addressed in their compliance programs. RIAs should also consider SEC risk alerts and staff bulletins as they tweak their policies and procedures to deal with emerging and perennial risk areas.

CCOs and investment advisors should never forget to take steps each day to improve their compliance programs. Although this task may seem to be overwhelming at times, RIAs can benefit from a methodical approach like the one Ted Lasso suggested. As Lasso and his assistant coach walk home after coaching their first game, his second-in-command moans, “I hate losing.” Lasso’s answer is “Bird by bird, coach.”

The quote is a reference to a book about writing entitled, Bird by Bird. In that book, the author tells a story about her brother who procrastinated on a school project about birds until the last minute. Her father advised the overwhelmed boy, “Bird by bird, buddy. Just take it bird by bird.” CCOs can follow that advice as they whip their compliance programs into shape.

By designing and implementing a robust compliance program, RIAs can protect investors and make examiners happier – even if they don’t have the memory of a goldfish.

 

 

 

 

This article is not a solicitation of any investment product or service to any person or entity. The content contained in this article is for informational use only and is not intended to be and is not a substitute for professional financial, tax or legal advice.