6 Essential Areas of Compliance

By Linda Leitz

Every job has an aspect that is necessary but not necessarily enjoyable. For many financial planners, that means compliance. But while familiarity with regulations and laws doesn’t make money, not being compliant can take a big toll in time and money. Some of the legal requirements might be easy to overlook, or you might not be up on the latest developments. I highlight six areas of concern.

1. Rollover IRAs

When a client leaves an employer, they have choices about what to do with the funds in their former employer’s retirement plan. For balances over $5,000, the former employee may leave the money in the former employer’s plan, move the funds to their new employer (if that plan accepts such transfers), or transfer the funds into an IRA. This last option creates the need for planners to be aware of their compliance obligations.

Advisors are subject to the DOL Prohibited Transactions Exemption 2020-02, points out Cindi R. Hill, CFP^®, IACCP^®, of Hill Compliance Advisors. Whether clients are new or existing, advisors are required to submit an analysis to the client within 10 business days of the recommendation to move money from an ERISA employer retirement plan. This analysis needs to indicate the impact of moving the funds from the employer account to an IRA or leaving the funds in place. The analysis needs to include the costs of the employer plan as well as the costs of the IRA. The analysis can also include the advantages of making the change, which may be qualitative, such as more or better fund options, or your professional advice. The analysis doesn’t need to suggest that the client will pay less in fees with the IRA. While some may assume that this requirement is primarily necessary for those using an AUM compensation structure, it applies to all business models.

DOL PTE 2020-02 has been challenged in court in both Florida and Texas, and a Florida court has struck down the law. But DOL can appeal the decision, so Hill advises that all advisors should comply with this rule at this time. C. Frederick Reish of Faegre Drinker Biddle & Reath suggests, “All things considered, the conservative, or ‘safe,’ position is to continue to operate as if the DOL’s fiduciary interpretation for rollovers was valid for both 2022 and 2023.” For NAPFA members who are CFP^® professionals, a fiduciary standard is in place for all financial advice, including recommendations for IRAs. Including the analysis report with your rollover recommendation is also a safe action, no matter what state you’re in.

2. Continuing Education

Advisors need to be aware of continuing education (CE) requirements for the states where they are licensed, says attorney Lori Neidel. While most state-registered investment adviser representatives (IARs) are aware of these CE requirements, IARs with SEC firms are also subject to the CE requirements of the states in which they are licensed. While NAPFA members have robust CE requirements, the states might have some specific criteria regarding the classes required.

3. Credential Compliance

CFP^® professionals are required to keep CFP Board informed of regulatory problems. If a CFP^® professional is censured by a regulatory agency, the advisor needs to inform CFP Board within 30 days of the notice by the regulatory agency and keep CFP Board informed about the outcome. This also applies to legal issues. If a CFP^® professional is charged with or convicted of a felony or relevant misdemeanor, the same reporting requirements apply. A relevant misdemeanor is generally considered to be one that involves financial malfeasance. Felonies of every type are reportable. Also subject to the reporting requirements are revocations of other licenses based on ethical breaches or termination for cause from a financial firm.

4. Advertising

At the end of 2022, a new SEC advertising rule came into being. While the earlier prohibition of testimonials is no longer in effect, testimonials must conform to restrictions around investment performance and there must be a specific advertising policy in the firm’s compliance manual. Even if the firm doesn’t advertise, a firm’s compliance manual must contain an advertising policy. A compliance manual including the advertising policy is advisable for state-registered advisors, too. And the compliance manual should be one that is actually followed—not just a set of rules that no one in the firm knows or understands. (For more on testimonials, see “A compliance professional’s take on the new marketing rule” in the September 2022 NAPFA Advisor.)

5. Culture of Compliance

John T. Carr of Carr Butterfield recommends that advisors learn what regulators are looking for and work in advance to comply. Carr says, “I often recommend that advisors obtain a copy of and review the SEC examination request letters for both new registrant and regular examinations. I say this because if a firm is ready to provide responses to all items requested in those letters that are relevant to their firm when the SEC actually calls, the examination outcome will almost assuredly be positive.” 

Carr has observed that SEC examiners respond well to what he calls a culture of compliance, including documentation of how you comply with regulations (because “if it’s not documented, the SEC will not believe that the firm is doing it”). This can include quarterly and annual reports on client securities, having an annual compliance assessment and report, good documentation on corrections of trading errors, records of compliance seminars you attend, and compliance alerts from your custodians. Incorporating into your procedures, workflows, and client documentation the elements of compliance may seem complicated, but ultimately will avoid the results of legal or regulatory problems.

6. Being a Good Person Isn’t Enough

It is largely recognized that ethics cannot be legislated. Good people do what is right because it is the essence of who they are. On the other hand, if a person is determined to cheat and harm others, the enforcement parameters and consequences established by laws and regulations may deter these bad actors. And if people of sound ethics unintentionally violate some of the minutiae of the regulatory or legal parameters, they will be subject to consequences.

NAPFA membership is based on competency and high ethical standards. If we aren’t aware of the details of the regulations by which we are governed, we risk violating them. Neither ignorance of our obligations nor an egotistical sense that we are above the minutiae of compliance will save us from the consequences of violations. We owe it to ourselves and our clients to make compliance an integral element of our financial planning firms.

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Linda Y. Leitz, Ph.D., CFP^®, is a NAPFA-Registered Advisor in Colorado Springs, CO.

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