So, you’ve decided to launch a robo-advisory firm? Understandably, your first considerations are likely tied to the functionality of your product. Perhaps the final testing of your algorithm is complete, and your attention has turned to how clients will use your product. What will your client interface look like? How will client information be collected? And most important, how will the product be marketed and sold to potential clients? All these considerations, and many more, speak to the entrepreneurial nature of the business. And while obviously essential to the viability of your enterprise, these questions leave out a critical analysis; namely what is possible under the law? Given the highly regulated nature of the investment advisory industry, it is critical that business decisions be made with legal compliance in mind. We recommended, as a best practice, to involve a legal professional in your initial build-out process as soon as possible. Let’s explore a few examples of how the early involvement of a legal professional could save your firm time and resources.
Rule 204-2 under the Investment Advisers Act (the “Act”) sets out a multitude of books and records retention requirements for advisory firms. The Rule’s requirements cover financial records, client communications, and compliance policies, among many others. It is easy to imagine a firm just starting its business life-cycle not being aware of all of its record retention obligations, not having built procedures to capture and maintain the required records, or simply having something fall through the cracks as other concerns take priority.
It’s not just information coming into firms that poses early legal compliance concerns, but also the client facing information that a firm itself is producing. In particular, a firm should be conscious of its sales and marketing materials. Rule 206(4)-1 under the Act, commonly referred to as the “Advertising Rule”, defines client communications broadly, and implements strict prohibitions against communications that could be perceived to be false or misleading. As with the retention of records, a firm too eager to enter the marketplace without the proper compliance policies and procedures in place to control the content of marketing materials runs the risk of early and/or repeated violations, or even worse, the implementation of a compliance program with notable gaps. In either case, it’s clear that a firm’s investment in its compliance infrastructure early will pay dividends in the long run.
While we chose to highlight just two examples of potential early compliance concerns facing firms in this post, there are clearly many more than we have space to cover. Whether your firm is in its early stage of operations, or already up and running, we strongly recommend that you involve a compliance or legal professional in your business decision making process. Don’t let a regulator be the one to let you know about deficiencies in your compliance program.
We hope that you continue to find our blog helpful, and we appreciate all the feedback that we have received so far! If you have questions about this topic or any of the others we’ve touched on, please feel free to reach out. Craig will be back soon to discuss guidelines for communicating electronically with clients.