Regulatory compliance can be an important topic when it comes to business planning. Most California business owners know just how important it is to follow regulatory compliance guidelines in order to avoid potential penalties from governing bodies like the U.S. Securities and Exchange Commission. Sometimes, however, SEC penalties might have a less devastating effect than an unhappy client who leaves–and makes that exit well-known to other clients.
Some investment advisers know this fact all too well. While many focus on the obvious threat of Washington regulators who can make their business lives a lot more difficult in the wake of perceived regulatory noncompliance, the truth is that one dissatisfied custodian for a client can sometimes do far more monetary damage than simple governmental penalties. In a situation where a brokerage firm who acts as the custodian of a client’s securities and sees what they think are too many red flags, the consequences to that adviser could be devastating.
Not only can that brokerage firm custodian end the business relationship with that particular adviser, they could contact the adviser’s other clients to let them know. This may lead to a snowball effect of other clients questioning whether that adviser is actually complying with regulatory guidelines. Should they feel there are also too many red flags, those additional clients might then decide to severe the business relationship; which could, in turn, have an even bigger snowball effect on remaining clients.
California investment advisers should keep this in mind as they engage in business planning. Regulatory compliance is a key part of the business formation process. Planning ahead now to ensure compliance later may save a burgeoning business from lots of headaches in the future.
Source: Reuters, “COMPLY-A slap by adviser’s custodian may be worse than SEC fine,” Suzanne Barlyn, July 28, 2012