In various communications and in a couple of different forums recently, industry regulators reminded firms that they need strong and effective compliance programs. Both the SEC and FINRA made it clear that problems lie ahead for firms that treat this function as anything less than a priority, or as something they can dish off to a third party and pretty much forget about.
The first warning flare came in the form of a National Exam Program Risk Alert issued earlier this week by the SEC’s Office of Compliance Inspections and Examinations.
The alert focused on the programs of investment management and advisory firms that had outsourced their compliance programs. These unaffiliated third parties include firms offering outsourced chief compliance officer (OCCO) services, as well as consultancies and law firms with specialized compliance practices.
Issues with Outsourcing
In roughly 20 of these cases, SEC examiners found problems with firms using OCCOs and other compliance consultants. The issues examiners found with these outside parties included the lack of a clear understanding of their clients’ business practices, incomplete access to their documents, and spotty communication with the firms’ principals.
In addition to detailing the problems, the alert included this bottom-line message: “Advisers with outsourced CCOs retain the responsibility for adopting and implementing an effective compliance program.” In other words, while firms may be able to outsource their compliance work, they don’t get to offload their liability.
FINRA: Priority Is Discipline, Not Fines
Although the Financial Industry Regulatory Authority (FINRA), the brokerage industry’s self-funded watchdog group, has issued its share of large fines, the regulator isn’t striving for ever-larger financial penalties. Instead, the organization’s main priority is on the “blocking and tackling” of enforcing its rules.
So said Russell Ryan, SVP and Deputy Chief of FINRA’s Department of Enforcement, in comments he made at the Securities Enforcement Forum last week in Washington, D.C.
According to Mr. Ryan, FINRA’s isn’t in the punishment business; they leave that to law enforcement. What the organization does focus on are fundamental rule violations, especially supervisory failures, sales of unsuitable products, and brokers whose outside business interests conflict with those of their clients. And FINRA is particularly aggressive when it comes to protecting elderly investors.
Even though its leaders are taking a positive tone and positioning the organization as a resource that can help firms get their compliance acts together, FINRA still has fangs and claws. Massive fines and the threat of major reputational damage stemming from an enforcement action remain squarely in FINRA’s arsenal.
Best Defense is a Good Offense
The obvious reality is that regulatory compliance for asset management and wealth advisory firms is growing more complex and therefore more challenging to manage. Whether it’s handled all in-house or through some form of outsourcing, regulators are making it clear that firms need pay more attention to their compliance programs than ever before.
The good news for firms is that great strides have been made with technologies that support the compliance function. One example is content automation solutions that enable firms to get the compliance language right in every piece of client-facing collateral.
By implementing these types of tools in support of a thorough and well-managed compliance program, firms can show regulators that they have the right compliance mindset, and that it’s a priority in their organizations. It’s a proactive step that can help keep them in regulators’ good graces.
