Advisors who are proactive with respect to compliance matters are, and should continue to be, much less susceptible to adverse client and regulatory matters. Some of the compliance-related issues that a proactive advisor should address are:

1. Regulatory compliance examinations. They continue at an aggressive pace. We continue to spend a great deal of time traveling to client offices throughout the country to conduct compliance reviews to better prepare our clients for regulatory-compliance examinations and to avoid potential adverse regulatory determinations.

2. Notice/registration filings. Advisors should conduct an ongoing review of each state in which they have clients or maintain an office or representative(s) for the purpose of compliance with state notification/registration-filing requirements. Gener-ally, with few exceptions, both SEC and state-registered investment advisors must make either a notification or registration filing in every state in which they have more than five clients. For state-registered advisors, the registration filing must be effective prior to engagement by the sixth client.

Therefore, since the registration process differs on a state-by-state basis (i.e. the length of time of the application process, firm and individual filing requirements, examination requirements, etc.), advisors should allow ample time to complete the registration process. A few states continue to maintain that the national de minimis exemption provided under NSMIA is not available to SEC and/or state advisors. If advisors maintain a place of business or any representative (i.e. including a solicitor) in a state, notification/registration and/or investment-advisor representative filings may be required, regardless of the number of clients in that state.

3. Foreign Clients. Many investment advisors currently service clients living abroad. Many countries regulate investment advisors based on the "current" residence of the client, not on citizenship or permanent residence. Advisors with foreign clients (including United States citizens temporarily living abroad) should ascertain the applicable foreign regulatory requirements.

4. Protective Legend. We recommend that advisors include the following type of legend on the summary account statements and/or fee invoices that they may prepare and forward to clients. The same goes for regular correspondence or newsletters they may send to clients, reminding them to notify advisors of any changes in their financial situation or investment objectives: Please contact (name of advisor) if there are any changes in your financial situation or investment objectives, or if you wish to impose, add or modify any reasonable restrictions to the management of your account. Our current disclosure statement as set forth on Part II of Form ADV is available for your review upon request.

5. Internet disclosure. Web sites must contain a legend disclosure (some of which are state-prescribed). Moreover, for liability-protection purposes, additional substantive disclosures should be included, depending upon specific Web-site content and links to third-party sites.

6. Advisor agreements and disclosure statement. One size doesn't fit all. Advisors' client agreements and written disclosure statement should reflect clearly advisors' services, operations and business practices. Moreover, to reduce potential client misunderstandings and/or liability claims, advisors also should disclose what services they do not provide or will not provide unless set forth in a separate agreement and/or for an additional fee.

7. Non-solicitation agreements. Too many advisors continue to leave themselves vulnerable to associates leaving the firm and taking clients with them. For this reason, we strongly recommend that advisors consider requiring each associate to execute a written agreement acknowledging the firm's proprietary interest in its client relationships and business operations.

8. Insurance. When is the last time you reviewed the policy? Does your policy provide coverage for all of your advisory operations? Have you reviewed the exclusions section of the policy? Have you increased the amount of coverage as your practice has grown? Advisors should substantively review policy coverages/exclusions no less than annually.

9. Privacy requirements. Regulation S-P will require SEC registered advisors to provide "clear and conspicuous" notice to consumers about advisors' privacy policies and practices. Regulation S-P also requires advisors to adopt policies and procedures that foster compliance within its parameters. Compliance becomes mandatory on July 1, 2001, for SEC advisors. Privacy legislation also is pending in a few states, and several others have proposed legislation, with the expectation that many states will soon adopt Regulation S-P type privacy requirements.

Thomas D. Giachetti, Esq., is a member of the Princeton, N.J., law firm of Stark & Stark. He can be reached at [email protected]