Published on July 27, 2020 by Sachith Vijayaraghavan and Pankaj Jha and Anitha Revanna
“If you think compliance is expensive, try non-compliance” – Paul McNulty, former US deputy AG
In today’s increasingly automated, fast-paced world, companies must ensure that their legal and regulatory reviews are accurate, efficient, and risk-averse. When a company fails to adopt compliance practices, the chances of being penalised are higher. Investment advisers have to be careful to adhere to regulations when marketing their financial products to prospects/clients.
In this blog, we discuss some compliance best practices and present an actual case that shows the importance of having a strong compliance framework in place.
The Office of Compliance Inspections and Examinations (OCIE) lists the prominent reasons for the violation of compliance issues not limited to:
Misleading performance results
Misleading one-on-one presentations
Claiming compliance with voluntary performance standards
Cherry-picked profitable stock selections
Misleading selection of recommendations
Compliance policies and procedures
Analysis of a recent case gives us a broader view of potential compliance violations:
A Boston-based investment adviser was fined USD 1m for failing to comply with advertising and compliance guidelines. According to the SEC’s order, the company allegedly distributed misleading marketing materials related to its historical performance. It was found that the materials represented the company as directly managing an investment, when in fact, it was an investment in a private fund advised by a third party.
Furthermore, by including the private fund's performance, the investment adviser misleadingly improved its investment track record. It was unsuccessful in implementing the policies and procedures contained in its compliance manual vis-à-vis the use of investment performance results in its marketing materials. It violated Section 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-1 and 206(4)-7 therein.
Both the rules apply only to investment advisers registered with the SEC; under rule 206(4)-1, investment advisers are prohibited from using any advertisement that contains an untrue statement of a material fact or that is otherwise misleading.
Under rule 206(4)-7, investment advisers are prohibited from providing investment advice unless the adviser has adopted and implemented policies and procedures designed to thwart a violation of the Advisers Act by the adviser. This rule requires the advisers to consider their fiduciary and regulatory obligations under the Advisers Act and to reinforce the policies and procedures to address them.
It is unlawful for an investment adviser registered under Section 203 within the meaning of Section 206 to provide investment advice to clients unless
(a) Policies and procedures: You have to adopt and implement written policies and procedures designed to prevent violation of the Act and the rules that the SEC has adopted under the Act;
(b) Annual review: You have to perform frequent reviews, at least annually, of the appropriateness of the policies and procedures established under this section and the effectiveness of their implementation; and
(c) Chief compliance officer: You have to designate an individual who will be responsible for overseeing the policies and procedures that you adopt, as mentioned above in section (a).
The most effective shield against such incidents is having adequate policies in place and not failing to implement them.
Thus, a company can safeguard itself, but only by adhering to compliance regulations.
Fines and sanctions do not only cost companies money, but also affect their reputation, goodwill, and trust with stakeholders.
These challenges can be mitigated by
establishing effective compliance policies and procedures
forming a robust training system to distinguish between ethical and unethical practices
having a marketing and distribution compliance manual
creating a dedicated team of experienced personnel to conduct reviews
Companies also need to look at marketing materials from the end users’ (i.e., the audience’s) point of view. Marketing compliance reviewers should ensure that the business analysts show performance numbers or other performance-related information in line with regulations.
Marketing compliance reviewers check whether the communication is fair and balanced, and not misleading to investors. They also watch for regulatory updates to mitigate possible risks.
It is never too late for a company to review its policies and procedures, and to have an effective marketing compliance team that can help mitigate risks.
Good will and a good reputation are two of the most valuable assets a company can have.
How Acuity Partners can help:
Acuity is equipped with personnel who have knowledge and experience in the field of marketing compliance, these professionals can help you safeguard your company from violating any guidelines set in place by the regulators. We also focus on thought leadership and understand compliance requirements based on different jurisdiction. Acuity has multi-functional compliance support which can enable you to reduce overall compliance costs.
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About the Authors
Senior Associate, Compliance Operations
Sachith Vijayaraghavan has 7 years of experience in compliance and has completed 5 years with Acuity Knowledge Partners. His expertise spans across the risk and compliance sector, focusing on compliance reviews of marketing/advertising materials and Email Surveillance. At Acuity Knowledge Partners he is part of the central compliance team and specializing in marketing material review. Sachith is an MBA from Bharathiyar University.
Delivery Lead, Compliance
Pankaj Jha has 9 years of experience in compliance and has been associated with Acuity Knowledge Partners for 7 months. His expertise spans across the risk and compliance sector, focusing on compliance reviews of marketing/advertising materials, AML and Email Surveillance. At Acuity Knowledge Partners he is part of the central compliance team and specializing in marketing material review. Pankaj is a graduate in B.Com (Hons) from Delhi University
Sr. Associate, Compliance Operations
Anitha has 6+ years of experience in Marketing Compliance. She has previously worked with State Street Global Advisors. Her expertise spans across compliance and risk sector, focusing on compliance reviews of marketing/advertising materials and social media contents. At Acuity Knowledge Partners she is part of the central compliance team and specializes in marketing material review and social media reviews. Anitha is an MBA graduate from RV Institute of Management, Bangalore University.
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