Operating a business involves more than just selling products or services. You have legal and ethical obligations to meet certain standards that impact everything from financial reporting to data privacy.
Failing to adhere to the diverse regulations across industries can have devastating consequences, from hefty non-compliance fines to complete shutdown.
Prioritizing regulatory compliance protects your business, employees, and customers in invaluable ways. It also enables you to focus on your core mission.
What Exactly is Regulatory Compliance?
Regulatory compliance means adhering to the laws, regulations, and guidelines that apply to your business activities. These rules come from government bodies like the SEC, state and local agencies, and industry-specific regulators. They dictate acceptable practices for how you handle everything from financial reporting and data privacy to workplace safety and environmental impact.
Regulations range from broad laws like Sarbanes-Oxley that affect public companies to narrow requirements like hazardous materials handling rules for manufacturers. Some regulations only apply to companies above a certain size, while others are universal.
To comply, you must know which regulations govern your operations and implement appropriate policies and procedures. This ensures you stay within legal bounds as you pursue your business strategy and goals.
For example, let’s say you’re a financial advisor who offers clients investment and retirement planning services. Here are just a few of the regulations you may need to comply with:
- SEC rules for registered investment advisors under the Investment Advisers Act of 1940
- State investment advisor registration requirements
- ERISA guidelines for advising retirement accounts
- FINRA rules for broker-dealer activities
- FTC requirements for consumer privacy and data security
As you can see, even a small financial services firm faces a complex web of compliance obligations from multiple regulators. To operate legally, all these rules must be baked into the advisor’s daily business processes.
HIPAA, PCI DSS, GDPR—What Do They All Mean?
If you feel overwhelmed trying to follow alphabet soup regulations, you’re not alone. Let’s quickly decode three of the most important compliance frameworks for business.
HIPAA Safeguards Patient Health Information
The Health Insurance Portability and Accountability Act (HIPAA) aims to protect the use and disclosure of patients’ protected health information (PHI). It applies to any health plans, healthcare clearinghouses, and most healthcare providers. Stiff penalties for noncompliance underscore how vital HIPAA is for healthcare organizations to embrace fully.
PCI DSS Secures Payment Transactions
If your business processes card payments, the Payment Card Industry Data Security Standards (PCI DSS) provide a framework of policies and procedures to keep payment data safe from breaches and theft. From small businesses to enterprise retailers, any merchant handling cards must make PCI DSS compliance a top priority.
GDPR Governs Data Protection in the EU
For companies with customers in the European Union, the far-reaching General Data Protection Regulation (GDPR) now sets binding requirements for handling personal data. GDPR non-compliance carries fines upwards of €20 million or 4% of global annual revenue.
While each regulation focuses on protecting specific types of information based on industry or location, they share a common purpose—to safeguard what makes your business successful and customers loyal.
Why Regulatory Compliance Matters So Much
Clearly, regulatory compliance isn’t optional—it’s mandatory if you want to stay in business. But why does it matter so much? What happens if you ignore compliance or just give it lip service without making it part of your culture?
Let’s look at some cautionary tales of what can go wrong when companies don’t prioritize regulatory compliance:
Costly Fines and Legal Penalties
One of the biggest risks of non-compliance is direct financial costs through fines, settlements, and legal judgments. For example:
- In 2021, Morgan Stanley paid $60 million to settle SEC charges that it failed to adequately monitor employees’ use of unauthorized messaging apps.
- Equifax agreed to pay $700 million in 2020 after a massive data breach caused by lax security practices.
- Wells Fargo was fined over $3 billion in 2020 for various compliance breakdowns, including creating millions of fake accounts.
Depending on the severity of violations, fines can easily run into the tens or hundreds of millions. And that’s not even counting potential class action lawsuits filed by customers or shareholders.
Damage to Your Reputation and Customer Trust
Compliance lapses also inflict lasting damage to your brand reputation. Customers won’t stick with a company they can’t trust to protect their data, ensure product safety, or deal honestly in business transactions. For example:
- 87% of customers say they would stop engaging with a brand they do not trust. (Edelman)
- 92% of people say they would leave a company after two or three negative brand experiences. (Customers 2020 report)
Once your reputation takes a hit, it can be incredibly difficult to regain customer and public trust. This directly impacts sales, retention, recruitment, and other key metrics.
Disruption to Operations and Shareholder Value
Severe compliance failures like large-scale fraud can completely derail business operations. Management attention gets diverted to legal crises instead of running the company. Shareholder lawsuits siphon resources. Lenders and investors grow wary.
In worst-case scenarios, companies end up delisted, taken over by regulators, or forced into bankruptcy. For instance, massive accounting fraud brought down energy giant Enron in 2001. More recently, Wells Fargo faced existential threats from its compliance breakdowns.
Lost Competitive Edge
Lagging on compliance also hurts your competitive positioning in the market. Consumers gravitate toward companies that earn their trust through ethical practices and transparency. Investors feel more confident providing capital to compliant firms versus those with compliance clouds hanging over them.
Meanwhile, all the time and money you sink into fines and lawsuits get diverted away from product innovation, customer experience, and other activities that differentiate you.
Best Practices for Making Compliance Work
If you recognize the immense value of compliance but don’t know where to begin, these practical steps will get you on the right track:
Know Your Unique Compliance Environment
Thoroughly research all regulations affecting your business based on location, industry, data collection activities, number of employees, and other factors. While core regulations like HIPAA or SOX may apply universally, others target narrower contexts. Understanding the full scope of requirements is essential for complete compliance.
Document Your Compliance Processes
For each regulation, outline the compliant processes and systems you have implemented where you store compliance documentation and procedures for regular reviews. Such documentation protects you in case of an audit or investigation. It also helps train new employees.
Utilize Automation Tools
Sophisticated governance, risk, and compliance (GRC) software centralizes compliance tracking across departments and regulations. Dashboards let you view compliance status at a glance, while timely alerts notify teams of deadlines and changes to avoid penalties. Automating previously manual reporting and documentation processes saves considerable time and money.
Make Compliance Part of Culture
Regular training ensures employees at every level understand their role in upholding standards. Establish channels for anonymous reporting of issues without fear of retaliation. Show that you encourage collaboration towards meeting goals rather than punishing honest mistakes. This motivates sustainable compliance.
While regulatory obligations can seem intimidating, a methodical approach prevents non-compliance. The payoff is immense: avoiding significant sanctions while building trust with customers and focusing on your passion. By making compliance a cultural priority backed by efficient systems, you’ll set your business up for stability and success.
Continuing the Compliance Journey Together
My RIA Lawyer’s SEC compliance team has helped hundreds of companies transform compliance from a cost center into a core strength. Its attorneys have decades of combined experience advising on regulations for the financial sector, healthcare, technology, manufacturing, and other industries.
Compliance is embedded in the firm’s DNA. The attorneys live and breathe this regulatory environment. Their passion is helping clients leverage compliance as a strategic advantage to enable sustainable growth and profitability.
To learn more about My RIA Lawyer’s services and how they can provide customized guidance, clients can contact the firm online at https://www.myrialawyer.com/ for a consultation.
