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Investment management compliance during a market crisis

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The Investment Adviser Association, ACA Compliance Group, ACA Insight and Old Mutual Asset Management released the fourth annual Investment Management Compliance Testing Survey this week.

The survey addressed compliance testing in the context of current events, focusing on how SEC-registered investment advisers have changed their compliance programs in light of the market crisis that began in September 2008. Additionally, reflecting current industry “hot topics,” the survey contained in-depth questions about firms’ testing practices in the areas of risk management, custody and safekeeping of client assets, marketing and advertising, and portfolio management.

Key findings (according to a press release) include:

  • There appears to be a trend towards CCOs serving solely in the CCO role, rather than in multiple roles within their firms. The percentage of CCOs who perform solely the CCO function (as opposed to wearing multiple hats within their firm) increased from just over 20% in our 2007 and 2008 surveys to 31% in 2009. Similarly, firms reporting 4 or more persons employed in compliance increased from 16% in 2008 to 24% in 2009. At least part of those changes, however, may be attributable to a shift in the demographics of survey respondents: This years’ survey attracted relatively larger, more established firms than the previous years’ surveys. For example, the percentage of firms reporting AUM over $1 billion rose from 44% in 2008 to 53% in 2009, and the percentage of firms reporting more than 51 employees increased from 22% in 2008 to 29% in 2009.
  • 43% of the survey respondents reported that their firm conducted new compliance tests or otherwise changed their testing in response to the market crisis. These new or heightened tests generally focused on three areas: Portfolio holdings and investment guidelines; adequacy of disclosure in light of new information about products or markets; and counterparties.
  • The vast majority (89%) of respondents did not change their custody testing in light of the Madoff scandal, perhaps because the overwhelming majority (93%) of respondents maintain client assets at a third-party, independent custodian. Respondents did not perceive custody to be a particularly high-risk area, although they did recognize it as one of the top three compliance “hot topics” for 2009.
  • 85% of the respondents reported that their firms did not cut compliance resources (and are not planning to) following the market crisis. Of the 15% of respondents who did cut or are planning to cut compliance resources, the top areas to be cut included: attendance at out-of-town compliance conferences, the overall compliance budget, compliance staff compensation, staff positions, and the use of outside compliance consultants. Many firms also reported layoffs in the compliance department. Notably, the SEC staff’s “don’t cut compliance” message to the industry seemed to have little effect on a firm’s decision whether or not to cut compliance. Only 9% of respondents reported that the staff’s message had any effect on their budgeting decisions.
  • Respondents pegged valuation as the “hottest” compliance topic. 41% of respondents said that the credit market turmoil had impacted their firm’s pricing and valuation processes, compared to 19% of respondents in our 2008 survey.


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