Financial Advisor Compliance Checklist
Financial advisors play a pivotal role in maintaining compliance within the financial services industry while managing their client portfolio. They must adhere to a complex web of regulations designed to protect investors, ensure market integrity, and — perhaps most importantly — foster trust in the financial system.
In order to act in the best interests of their clients, financial advisors should know the applicable regulatory guardrails inside and out, follow their company’s compliance program to the letter, and provide a full disclosure of material facts. It’s a tall order — fortunately, processes and tools exist to ensure advisors check every box and act in the best interest of their clients and their firm. Review the following checklist to ensure you’re maintaining compliance with financial regulations in the name of providing sound investment advice.
First, Familiarize Yourself With Applicable Regulations
Regulations governing the financial industry are subject to frequent changes and updates. Compliance officers must establish a robust system for keeping financial advisors informed about regulatory developments — and the ensuing compliance requirements — at the local, national, and international levels. Unfortunately, many financial advisors don’t entirely understand the rules (and don’t seek clarification with compliance officers), which can result in either violations or improperly placed restrictions.
The Investment Advisers Act of 1940 regulates and defines the role and responsibilities of U.S. investment advisors and is regularly updated based on industry events. The Act pertains to all financial advisors who are registered with the Securities and Exchange Commission (SEC) and thereby permitted to advise and perform transactions on behalf of their clients. Key rules within the Act that advisors must familiarize themselves with include:
- Rule 275.204A-1 (Code of Ethics): Registered financial advisor firms must adopt and enforce a written code of ethics.
- Rule 206(4)-7 (Policies and Procedures): Registered investment advisor firms must implement written policies and procedures designed to prevent, detect, and correct violations of the Act.
- Rule 206(4)-7 (Chief Compliance Officer): Requires registered investment advisor firms to designate a Chief Compliance Officer to administer compliance policies and procedures.
- Rule 206(4)-7 (Annual Compliance Review / Annual Certifications): Specifies that each registered adviser must review their firm’s policies and procedures annually to verify their adequacy and the effectiveness of their implementation.
Additionally, advisors need to be aware of rules established by the Financial Industry Regulatory Authority (FINRA), including the following:
- Rule 3220 (Influencing or Rewarding Employees of Others): Known informally as the “Gifts Rule,” this rule forbids registered financial firms from giving anything of value to (i.e., bribing) employees of another firm in order to influence business decisions.
- Rule 3270 (Outside Business Activities of Registered Persons): Prohibits registered advisors from receiving compensation from another firm outside the scope of normal business activities.
- Rule 3280 (Private Securities Transactions of an Associated Person): Limits private securities transactions by associated persons of a registered firm.
It can be incredibly challenging to commit all applicable rules to memory, let alone fully comprehend their intricacies. On top of this, financial regulations are constantly changing in response to industry developments. To stay abreast of changes to these and other critical rules, it’s recommended that financial advisors and compliance officers subscribe to regulatory alerts and take advantage of trainings or forums that cover regulatory updates in detail.
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10 Best Practices For Financial Advisor Compliance
Use the following checklist as a general guide to maintaining regulatory compliance while providing the best service to your clients. Of course, your policies and procedures may be unique to your firm, but the following recommendations can apply broadly to any financial services firm registered with the SEC and governed by the Advisers Act. When in doubt, always consult your firm’s compliance officer to ensure you’re operating above board.
Create Internal Compliance Policies and Procedures
This first item may seem obvious, but it’s surprising how many firms overlook the importance of comprehensive compliance policies. Compliance with financial regulations is paramount, of course, but don’t overlook policies that protect employees from potential mistreatment by colleagues, supervisors, or associated persons. Policy management software can ensure employees have easy access to up-to-date policies around regulations pertaining to conflicts of interest, insider trading, political contributions, and other potential risks, as well as discrimination, sexual harassment, and other HR violations.
Use your policies to encourage a culture of compliance. Make written policies easily accessible to all advisors and firm employees and reward efforts to maintain compliance appropriately. Regularly review and update your policies to reflect changes in the regulatory environment and your firm’s operations.
Provide Compliance Training and Education
Building a strong compliance culture begins with providing comprehensive training to all employees. Training and certifications shouldn’t be limited to financial advisor compliance — all employees of a registered financial firm should be well-versed in (or at least familiar with) applicable regulatory requirements and understand the implications of noncompliance. Regular training sessions and updates regarding regulatory changes, compliance best practices, and ethical standards can reinforce compliance best practices and mitigate the risk of inadvertent violations.
While training should be structured, it doesn’t need to be limited to one format; offer webinars, workshops, and self-serve resources that employees can access at their convenience.
Establish Supervision and Compliance Oversight
On top of ensuring all team members understand their responsibilities in maintaining compliance, establish a clear-cut supervisory hierarchy and system for monitoring and reviewing financial advisors’ activities. Automating these regular compliance tasks can help your firm uphold its Codes of Ethics and Conduct and encourage employees’ adherence to the policies and procedures.
Maintain Proper Licensing and Registrations
It can be difficult to manually keep track of individual registration status or upcoming renewal requirements. Automated software can help streamline licensing and registration responsibilities and ensure all advisors are up-to-date and in compliance with industry regulations.
Implement Strong Documentation and Record-Keeping Practices
Maintaining thorough documentation is a requirement of FINRA, including keeping detailed records of all client interactions, risk assessments, and training sessions. Specifically, all client communication must be kept for up to six years — this includes emails, newsletters, and even social media posts.
Accurate and comprehensive record-keeping is crucial in demonstrating compliance during regulatory audits. Your archiving systems should be organized in a way that makes it easy to surface any document in any format, thereby demonstrating transparency and accountability (also pillars of FINRA requirements).
Automate Monitoring and Compliance Report Reviews
Even the most diligent compliance teams are fallible, but the smallest, most innocent mistakes can have dire consequences regarding advisors’ ability to maintain licensure. Automated compliance software can prevent honest mistakes — and more nefarious behavior — from losing valued clients, ruining your firm’s reputation, or worse.
Automation can even surface risky behavior before it causes more serious problems, escalating potential risks to the proper teams so they can take appropriate action.
Take Data Security and Privacy Seriously
Don’t treat cybersecurity as an afterthought! Safeguarding client information is a critical aspect of financial and investment compliance — quite possibly the largest area of concern for advisors and compliance teams. The last thing you want your firm to be known for is a data breach or theft of client information.
Establish and maintain robust data security protocols to protect sensitive client data from cyber threats, utilizing measures such as encryption and access controls. Your investment advisor compliance program should include procedures around safeguarding client data and ensuring the fidelity of any cybersecurity measures. Regularly audit and update your security program to stay ahead of evolving cybersecurity risks and adhere to privacy regulations.
Clarify Responsibilities Around Reporting and Regulatory Filings
Ensure that all registered advisors understand their reporting obligations and the filing process. Filing timely reports and any other required submissions is key to maintaining good industry standing and avoiding disruptive audits.
Conduct Independent Compliance Reviews and Risk Assessments
Perform regular internal audits to assess the effectiveness of your investment advisor compliance program. Internal audits should involve a comprehensive review of policies, procedures, and documentation — treat these as if FINRA were conducting them.
Periodic risk assessments can also help financial advisors identify potential compliance vulnerabilities hiding in plain sight. Assessments should encompass changes in the regulatory environment, internal processes, security protocols, and the risk profile of clients. Identify areas for improvement and take prompt corrective action to strengthen the overall compliance framework.
Stay Up to Date on Regulatory Changes
As the world becomes more connected and transactions become even faster and easier, it’s more critical than ever to establish a robust system for staying informed about regulatory developments at every level. Do so by subscribing to regulatory alerts, participating in industry forums, reading industry publications, joining industry organizations, following experts on their digital channels — and encouraging your associates and employees to do the same.
Today’s best compliance software solutions automatically update with changing regulations, catching changes your teams may miss in the course of doing business. Investing in software enables advisors to deliver better service while staying above-board and ahead of the curve in an ever-changing landscape.
For more information about the StarCompliance all-in-one employee compliance solution and comprehensive training software, schedule your free demo today.
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