11/24/2014 - The Dreaded Annual Compliance Questionnaire

By Wendy Lanton

It's that time of year when the compliance department hands out the annual compliance questionnaire. It comes with an overwhelming sense of anxiety to many advisors even if they have nothing to fear. Why is it so dreaded? Here are the top five reasons why it is so feared:

  1. As a general rule, advisors don’t like paperwork and most are notoriously bad at it. Top producing reps usually have a sales assistant or a junior broker that handles all the paperwork. However, compliance questionnaires can’t be answered by anyone but the advisor.
  2. Whatever answer and advisor provides in the questionnaire stays there as part of the firm’s required books and records. This industry has become famous for dredging up old books and records and using it against the firm or the advisor.
  3. It is time consuming. There can be upwards of 50 questions on the annual questionnaire and not just yes or no answers. This takes valuable time away from production.
  4. If there is something new to disclose, such as bankruptcy, judgment or creditor negotiation, most often advisors are afraid it will adversely impact their licenses.
  5. They did something during the year-like made a political contribution-and forgot to tell the firm. Now the question comes up on the questionnaire and advisors are likely to panic.

Fortunately or unfortunately, depending on what side of the table you sit, the questionnaire is important. So, lets see why so much importance is placed on this document?

  1. It is required. That means low hanging fruit for the regulators if questions are not asked and answered.
  2. It helps the firm paint a clearer picture of the advisor (liens/judgments/outside business activities/personal websites/blogs).
  3. It provides the firm with an opportunity to view its advisor makeup and help drive the overall compliance structure.

The way an advisor answers these questions can make or break their career. One white lie and the advisor’s career can be destroyed. So what is the best approach for the advisor to effectively answer these questions?

  1. Be honest, as inevitably if you lie, someone will find out.
  2. Do intensive fact check. For example, if you had a personal blog that is still open but you do not actively use, in the questionnaire do not state that you don’t have one. Rather, explain the facts in details.

The best way to address any doubts is to ask questions. Just like in grade school, there is no such thing as a stupid question. Another great way to address any doubts is to ask your compliance department for a copy of your full form U4. Documents you can retrieve on your own like the FINRA public disclosure website and the new CRD enhanced snapshot report may notcontain all your information.

So why is filling out this annual document so important? Failure to update a Form U4 can come with industry-mandated sanctions. For example, failure to comply with Rule Requirements for outside business activities can result in monetary sanctions from $2,500 to $50,000 and suspensions ranging from 30 days to an industry lifetime ban. U4 violations range from $2500 to $25000 and can lead to 5 to 30 day suspensions. That’s just the end result. FINRA inquiries that lead to the fine or suspensions are also time consuming for the advisor and the firm. Usually, they involve engaging and attorney(s) on behalf of the advisor to mitigate the fee and/or suspension.

Once an advisor has a blemished record it stays with their CRD registration forever. Some firms won’t hire an advisor with a tarnished record. Some states will also consider not registering an advisor based upon their record. So, a word of advice is do not dread the questionnaire but do your best to provide honest and thorough answers.

Wendy Lanton is Chief Compliance Officer at Melville, NY-based Lantern Investments.


Source URL:https://wealthmanagement.com/regulation-compliance/dreaded-annual-compliance-questionnaire

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35 Pinelawn Rd., Suite 101E
Melville, NY 11747

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Wealth Advisory solutions provided by subsidiaries of Percheron Asset Management Group, Inc.: Herold Advisors Inc. and Lantern Wealth Advisors, LLC., SEC registered investment advisors. Securities offered through Herold & Lantern Investments Inc., a registered broker dealer, Member FINRA, MSRB, SIPC.

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