It’s not uncommon for the compliance function within most registered investment advisors and broker/dealers to get overshadowed by the organization’s core investment activities. This is not to say the area isn’t vitally important, but it’s also true that those outside of compliance rarely understand all that goes into the day-to-day activities of most chief compliance officers. Unlike other ancillary functions, however, when it comes to compliance, what executives don’t know can hurt them.
This is particularly the case during periods of disruption, when the regulatory landscape shifts and compliance teams are stretched thin due to more pressing and pronounced demands. These can revolve around frequent investor disclosures, customer complaints and inquiries, liquidity risk oversight, intense scrutiny around reported valuations, managing cybersecurity risks and, in the case of COVID-19 disruption, effectuating business continuity plans.
Based on recent enforcement actions, the risks to senior executives have become more acute following guidance that it’s incumbent upon investment advisors and b/ds to “provide effective staffing, sufficient resources and a system of follow-up and review.” This was a point the SEC emphasized in noting that in some cases, “it may be more appropriate to hold the firm liable rather than the compliance officer.” Moreover, with the SEC standing by its scheduled Reg BI implementation date, the agency is reaching over the heads of CCOs and principals to make boards accountable for all of the necessary precautions.
This explains the material uptick in broker/dealers and investment advisors inquiring about compliance consulting services, which can both serve as a relief valve for understaffed teams or add experience to reinforce existing compliance programs. It’s often overlooked, too, but there is nothing that can derail a firm’s growth aspirations like a regulatory inquiry that turns into an investigation, progresses to a deficiency letter and results in enforcement action. When these lapses become public, particularly in recessionary environments, enforcement actions can open the floodgates.
For many investment advisors and b/ds, a wise choice when augmenting their compliance team is to tap outside counsel. Pairing counsel with a consultant can result in a more cost-effective and “experienced” total compliance solution. But beyond just the cost-effectiveness, there are other advantages in tapping a specialized consultant alongside external counsel that are often overlooked.
Dedicated Resources/Relevant Experience
Chief among the benefits is access to a team of compliance professionals with specialized skill sets specific to the unique demands of the role. Consultants have served in similar roles hundreds of times and can anticipate how regulators react; understand how to implement solutions and have the tools to do so; and recognize what a comprehensive and adequate compliance program looks like and how it fits into the broader organization.
One notable benefit of utilizing outsourced compliance is to take advantage of the wide-ranging experience most consultants have, because they have previously served as chief compliance officers themselves. And many continue to serve in the same capacity in interim roles or as outsourced CCOs. This experience is invaluable in establishing the appropriate interactions with other functions, and they also appreciate what’s at stake and can be empowered to step in and execute.
Efficiency and Time Savings
From the CCO’s perspective, the ability of consultants to customize their services in a way that fits the firm’s unique needs is often the most valued differentiator. Sometimes, outside consultants can provide service provider oversight, which frees up internal staff to do other more pressing work. They can also take on more comprehensive one-time projects, while the existing team focuses on their day-to-day responsibilities.
Internal support, with an on-site presence, also allows for more control and flexibility to ramp up services as demands dictate. And outsourced and interim CCO support can also provide continuity in the event that situations change or key executives leave. In this sense, for firms in transition, an outside consulting firm can be the one constant from the perspective of regulators.
Understanding of the Risks
From the perspective of executives, among the most material benefits of a consulting service is the unbiased objectivity that only a third party can provide. This can help to identify and resolve potential conflicts of interest within the business. Whether in a consulting capacity or as an outsourced CCO, independence allows for recommendations and observations that in-house compliance officers often struggle to convey. Consultants bring deep insight into how policies and procedures are completed and can identify if sufficient resources have been allocated.
A Consultant Checklist
Merely hiring a consultant won’t exculpate a firm from regulatory risks. However, the right firm with the right experience can address and mitigate the threat of enforcement action. With experience across the broader industry, consultants can also add perspective in cases of “overcompliance” that are conservative to the point that marketing and sales efforts are affected. This is where the most experienced consultants earn their keep.
For growing firms, the breadth of their offerings and capabilities is also critical to provide flexibility to react to a changing marketplace. As firms grow and add staff, for instance, the ability to offer FINRA and SEC testing and licensing in-house can deliver added efficiencies. CCO experience also can’t be understated, whether it’s just appreciating the risks and know-how of in-house CCOs or stepping in on an interim basis as needed.
Given the volatility in the markets, when the whole world is focused on their investment risk, it becomes easy to overlook the regulatory risks. But specialized consultants, those with long-standing reputations, deep benches and a roster of clients, can bring a resourced team to respond on a timeline and budget investment firms and broker/dealers require.
Mark S. Alcaide leads the Compliance Consulting Division of Foreside Financial Group.