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Ultimate Guide to SEC Compliance for Financial Advisors

Financial advisors trying to understand the SEC compliance guidelines

The Securities and Exchange Commission (SEC) oversees the enforcement of financial securities laws. On its website, the SEC has organized some of its compliance guides for small businesses and brokerages. It lists nearly 80 individual topics, each of which takes you to a guide that, itself, is just a summary of much more in-depth issues. This information helps regulated businesses know what they need to know so that they can then get the appropriate counsel and education when their practice crosses into a regulated space. When it comes to SEC regulations and compliance, there are no shortcuts. If you work in finance, your firm will be subject to the commission’s rules which it enforces vigorously.

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What Does the SEC Regulate?

The Securities and Exchange Commission regulates trading and financial transactions in the United States. Its authority extends to any regulated financial product covered by the 1934 Securities and Exchange Act, and their subsequent updates. Its authority also extends to any individual or company participating in public markets or trading regulated products in the United States. With financial practices of almost any kind, this means that the SEC is heavily involved in your business because this is a broad mandate.

For example, any time a business sells securities of any kind, the SEC regulates that transaction. This applies to both primary markets when a company first issues and sells a security, and secondary markets when individuals trade securities among themselves. It also applies to third parties, such as when brokers execute a trade on behalf of their clients. In all of these cases, the SEC makes and enforces rules about who can participate, how to conduct the transaction and more.

Or, say you operate strictly as a financial advisor. You don’t actually conduct any trades yourself, you just help people decide how to manage their money. This business overlaps with securities trading since money management frequently involves advice on asset management. This loops the financial advising, consulting and planning industry into the SEC’s mandate, which regulates the industry under a special statute called the Investment Advisors Act of 1940. Under this law, the SEC sets recordkeeping requirements, defines and enforces standards of fiduciary duty and even sets the rules for marketing and client communication. 

In 2022, the agency levied a record-breaking $6.4 billion in fines for breaking various rules and regulations. This came from a combination of higher penalties and more cases, with the average cost of noncompliance reported at $14.82 million.

How Can Your Firm Keep Up?

Financial advisors reviewing guidelines for SEC compliance

When it comes to SEC regulation, the rules for any given firm depend entirely on the nature of that business and its practices. For example, take investment advisers. An adviser must register with the SEC once it has more than $110 million under management and may have to do so once it has over $25 million under management depending on the nature of its state regulators. Any financial advisor that does not have to register with the SEC must typically register with state authorities, which in turn report to and work with the commission.

But regulation doesn’t start or stop with registration. Even unregistered financial advisors still have SEC regulations they must follow regarding marketing, fraud and misrepresentation, accredited investment, fiduciary responsibility and more. 

That’s just for investment advisers. This says nothing about broker-dealers, which have their own sets of rules and regulations they must follow. How should your firm keep up? The answer is education and proper legal counsel.

1. Get Educated

The financial world has a wide range of textbooks and courses available to help your firm understand regulatory compliance requirements. While this is by way of example, not recommendation, the Practicing Law Institute has books on the subject.

Your firm should always keep an up-to-date hornbook on the subject in the office. This is an essential tool for any practice.

2. Legal Advice

Regulatory compliance falls under an area of the law known as “administrative law.” This is the specialty of understanding the rules and operations of various agencies, such as the SEC. Other lawyers may specialize in securities law and litigation (as this writer did). In both cases, this is an attorney who can advise your firm as to how SEC regulations apply specifically to your business practices, and who can help you understand exactly what you need to do in order to comply.

But, take note: As a registered investment advisor (RIA) or an investment adviser representative (IAR), you have a responsibility to know the SEC regulations.

Bottom Line

Financial advisors discussing SEC compliance

For financial advisors, navigating the SEC is not optional and not simple. The best approach is to learn the basics of your professional responsibilities and then get a lawyer who can help you with the finer details so that you know you’re protected. These steps can help you prepare for any issues that may arise.

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