How to keep the SEC happy without going out of business.
Regulations. The SEC has spawned a bunch of them lately. Some are new, some are revised, some are highlighted by current events and some merely on the horizon-for now. In the last 12 months, the SEC has pushed to the forefront of every advisor's consciousness its policies on proxy voting, best execution and client asset custody.
"These regulations don't really affect nondiscretionary advisors," says Carol Wilson, a fee-only planner in Salt Lake City, Utah. In other words, we could avoid the burdens these regulations pose if we just stopped managing money. But for most of us, that's not realistic.
As you might imagine, advisors' responses to these regs vary from denial to full compliance. And, while full compliance may sound painful, you might be surprised at how simple it can be once you create the right documentation and procedures.
Warren Mackensen, owner of Mackensen & Company Inc. and ProTracker Software Inc. (www.protracker.com) in Hampton, N.H., is someone who's thought long and hard about regulatory compliance. His ProTracker software, used by hundreds of financial advisors to manage client contacts and workflow, is written with the same meticulous devotion he brings to the Compliance Manual he also has designed for the profession's use. Mackensen's manual contains sections for the files SEC auditors traditionally want to see when they conduct an audit, such as Bank Statements, Advertisements, and Complaints and Litigation, as well as sections for the kinds of regulations that are the subject of this article: Proxy Voting, Best Execution, and List of Discretionary Accounts and Powers of Attorney.
Mackensen, as well as many attorneys who specialize in regulatory compliance, will tell you the documentation of procedures is almost as important as the compliance itself. In some cases, auditors won't go beyond examining the regulated entity's written policy-hence, the importance of a compliance manual.
Best execution is a prime example. Tom Giachetti, with Stark & Stark, a Princeton, N.J. law firm that works with advisors on issues of compliance with the SEC and other regulatory bodies, says, "We strongly recommend that every advisor have appropriate, written best execution and trading procedures, and corresponding investment advisory agreement and Form ADV disclosures regarding its execution and trading practices, including disclosure relative to potential conflicts of interest."
Which is precisely what is covered in Mackensen's Compliance Manual section on regulations pertaining to Best Execution, for example. The process of what an advisor needs to do to comply with best execution requirements is laid out in Mackensen's Manual as follows:
"Periodic Assessment: The Investment Committee, which comprises the Registered Investment Advisers of the firm, meets quarterly to assess whether clients are receiving the best execution. The assessment includes an examination of the firm's practices with regard to:
Selection of custodians
Best execution reports from these custodians