More On Legal & Compliancefrom The Advisor's Professional Library
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
- Best Practices for Working with Senior Investors Securities examiners deal harshly with RIAs that do not fulfill their fiduciary obligations toward senior investors, as the SEC and state securities regulators view older investors as particularly vulnerable and in need of protection.
Financial services firms give lip service to the importance of compliance, but the majority fails to devote adequate resources to the function, according to a new survey by Cipperman Compliance Services.
The survey found that the compliance function in these firms tended to be underfunded and understaffed.
Survey participants included broker-dealers, asset managers, alternatives managers and wealth managers.
The survey found that on average, 74% of those tasked with compliance duties believed their firms should commit more resources to the compliance function.
Eighty-three percent of broker-dealers and 58% of asset managers said they needed to focus more resources on compliance.
“Based on our experience with many firms and the regulators, we believe firms should spend a minimum of 5% of revenues or 2 bps of assets under management on the compliance function,” CCS chief executive Todd Cipperman said in a statement.
“Investing in compliance protects the franchise and preserves assets under management. We view compliance as the firm’s defense. And defense wins championships.”
The statement pointed to a 2013 study sponsored by KPMG, Alternative Investment Management Association and the Managed Funds Association that said firms should be devoting approximately 7% of operating costs to compliance, with a minimum expenditure of $700,000 per year.
The CCS survey found that only 6% of respondents complied with these industry best practices, leaving them vulnerable to a charges by regulators or clients that they lack a culture of compliance.
“Firms need to show their commitment by dedicating the necessary resources,” Cipperman said. “Simply naming one compliance officer is not a compliance program. Most firms need a staff and outside support to adequately address all the regulatory requirements.”
Alternatives managers, in particular, reported less engagement with the realities of post-Dodd-Frank compliance than other parts of the financial services sector.
“New regulations and reporting requirements in the alternative space overburden hedge funds and private equity firms,” Cipperman said. “Many firm leaders have no regulatory background, so they don’t know where to begin.
“These firms are also being pushed by institutional clients including public plans, mutual funds and defined benefit plans to implement a credible compliance program.”
What Compliance Committee?
Most firms in the survey had failed to set up and use an internal compliance committee to address regulatory issues in a timely manner and discuss the compliance program at periodic intervals.
Fifty-seven percent of asset managers reported that they either had no compliance committee or had one that rarely met or were unsure. Eighty-three percent of broker-dealers gave similar responses.
“It is difficult to build a culture of compliance required by the current environment if your firm does not have a compliance committee,” Cipperman said.
Perhaps because many respondents did not have a compliance committee, 40% of alternatives managers were “unsure” when their last SEC exam took place, and 16% of asset managers were unable to recall their last SEC review.
The lack of awareness did not end there.
A full 50% of broker-dealers were unfamiliar with any major SEC investigations.