Four years into this SEC regime, a wave of regulatory changes will crash into RIA. Among this wave, two significant rules stand out: the Outsourcing Rule and the proposed FinCEN AML Rule. While these regulations are designed to increase transparency, accountability and safety within the industry, they come at a cost – both in time and money – to VNR.
The outsourcing rule, introduced by the SEC, requires RIAs to exercise greater care when engaging third-party service providers. According to this mandate, RIAs must verify, supervise and thoroughly document their relationships with external entities to protect clients' interests. The objective is clear: to mitigate potential risks and ensure that external functions comply with regulatory standards. However, complying with this rule requires a significant investment of time and capital, as VNRs must devote significant effort to due diligence, ongoing monitoring and regulatory reporting.
Similarly, FinCEN's proposed LPP Rule casts a whole new web of compliance obligations on RIAs, expanding anti-money laundering requirements to cover their operations more comprehensively. This rule mandates rigorous customer due diligence, suspicious activity reporting, and robust AML program enforcement. While the main goal is to strengthen the financial system against illegal activities, the road to compliance is paved with challenges. RIAs must invest in enhanced due diligence procedures, employee training and sophisticated monitoring systems to meet these stringent AML requirements.
Compliance with both rules is no small feat, and the consequences have never been more important. With the Outsourcing Rule, advisors must demonstrate a masterful understanding of every partner, vendor, and firm they work with. Advisers will need to be ready, willing and able to change any of these third parties at a moment's notice if they have reason to believe they are not meeting specific standards.
The LPP rule takes this further by subjecting RIAs to potential criminal liability for failing to prevent money laundering or terrorist financing. LPP rules have existed for decades, beginning with the Bank Secrecy Act in 1970 and undergoing significant revisions with the MLCA of 1986 and the Patriot Act of 2001. But never before have RIAs been subject to this level of oversight, compliance and consequences.
In light of these regulatory hurdles, advisors should be quick to consider how much time they have to begin complying with the new regulations. And when it comes to compliance, do they have the right partners to weather the storm, or are they sailing against the wind? As the burden of compliance increases, VNRs must assess whether their service providers are facilitators or impediments to their success. Are these partners simplifying operations, freeing up valuable time for meaningful work, or are they adding layers of complexity, taking attention away from core responsibilities?
In the age of increased regulation, the choice of partners becomes essential. RIAs are wise to find alliances that increase their agility, resilience and competitive advantage in the face of evolving regulatory landscapes. The right partners should serve as enablers, not barriers, empowering VNRs to thrive. And for advisors who don't think they have the right partner but aren't sure where to start, the answer is simple: technology.
Compliance with federal law isn't rocket science (unless you're SpaceX). Record keeping, continuous monitoring, reporting, due diligence, OFAC screens, and employee training are all made into easy-to-use, off-the-shelf solutions. This should be a useful reminder to think throughout the technology stack to determine if advisors have the right partners to make their lives easier.
If an advisor isn't spending time exclusively serving clients or prospecting, she probably doesn't have the right stack. Fortunately, RIAs have about a year to come into compliance before all of these rules go into effect, so there's no better time to start researching than now!
Mazi Bahadori is the CCO and COO of Altruist.