Compliance requirements to consider before going RIA

The RIA space continues to evolve rapidly and maintaining compliance has become increasingly challenging for independent advisors.

Ian Meiksins, president and co-founder of Key Bridge Compliance says the RIA space allows for more interpretation of rules compared to the prescriptive nature of compliance at large broker-dealers.

This flexibility can be a double-edged sword, however, requiring RIAs to develop highly tailored policies and procedures.

 “That could be a tough transition for anybody. It’s a really big place that's caused some difficulties,” he says.

He highlights the SEC’s proposition of 26 new rules in the last year and alludes to the current regime which is proposing rules and regulations at an “unprecedented rate”. “It's changing on all of us as quickly as we've ever seen,” says Meiksins.

Embarking on the RIA journey involves navigating a complex landscape of compliance requirements. That’s why it’s important for RIAs to understand their priorities when first starting out.

Alisha Dowell, an independent compliance consultant, says the first thing that advisors should keep top of mind is knowing what regulator they’re going to be dealing with and who they’re required to register with. Advisors should also “be conservative” when they make their estimation for how many assets they’re taking with them.  

“In general, the line is $100 million dollars,” she says. “If you're under that, the likelihood is you're going to be registering with individual state registrations. Over that line, it will be with the SEC. That’s the first decision you have to make, because that impacts timing and all other kinds of things.”

Advisors who find themselves under that $100 million dollar line, she believes, are better served teaming up with someone or a group of advisors who will “get you over that 100-million-dollar mark, so that you can deal with the one SEC registration and their requirements, versus potentially having to juggle multiple state registrations,” she noted.

Dowell highlighted the registration process for advisors who are breaking away, will be the next priority, as advisors are required to fill out the right forms to successfully register with the SEC and/or states.

First and foremost, are ADV documents, including ADV Part One, which outlines information about the firm, the owners, potential clients, employees and any potentially disclosable events.

ADV Parts 2a and 2b are “the narrative portions of your disclosure documents.” ADV Part 2a should be the firm’s brochure that “gets down into the business of what you're doing, what fees you're planning on charging, any conflicts of interest, the background of the firm,” Dowell explains. Part 2b is the brochure supplement, which should outline the background on the individuals who will be representatives of the firm.

Meiksins asserts these documents need to be “in plain English." He adds: "It needs to be specific. It needs to be tailored, but it also has to be understandable to a retail client, which is really important.”

Dowell also highlights the case for individual representative registration. She says that while the firm may be SEC registered, individual representatives within the firm are actually registered with the states where they’re located.

For example, “if your firm is housed in DC, but you live in Florida, the state of Florida has jurisdiction over you as an individual. Even though the SEC has approved the firm, the state of Florida still has to prove an individual as the representative,” she explains.

Advisors who plan to offer financial planning or other services should have specific, tailored agreements to what they’re doing, how much they’re charging for it, and outline the specifics.

“That's not just a regulatory moment, that's a legal and kind of a CYA moment for the firm,” Meiksins says. “If you're going to do something and you're going to get compensated for it, you want to make sure that it's accurately described and disclosed.”

Should there be a conflict or any sort of issue with a client, there’s always a document and agreement they can always refer to.

“That's why it's really important to work with legal counsel and to work with compliance consultants to make sure that those are done in a very well and tailored manner,” he added.