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IAA Cautions New SEC Rule will Increase Your Compliance Costs

A recent blog posted by Investment Adviser Association (IAA) General Counsel Bob Grohowski and Assistant General Counsel Sanjay Lamba warns that managing the rising cost of compliance is becoming a zero-sum game.

Are you ready to play?

According to the IAA, the Securities and Exchange Commission (SEC) is considering a new rule to require investment advisers to hire third parties to conduct their compliance reviews. How deep and how wide those reviews must go is still TBD. But one thing is clear to the IAA, third party review will add additional incremental costs to compliance.


Cost of compliance is no object…to the regulators

The IAA blog noted that the out-of-pocket costs of compliance are of little concern to the regulators, citing former SEC Commissioner Dan Gallagher’s comments regarding the aggregate impact of financial services regulations. Regulators, he said, do not consider the “overall regulatory burden on financial services firms when determining whether to impose additional costly regulations.” Rather, he explained that ” regulators are, when it comes to the possibility that our rules are causing death by a thousand cuts, the proverbial ostrich—head firmly entrenched in the sand.”


Add 1 CCO + compliance infrastructure = $$$?

IAA’s bloggers infer that once the SEC required advisers to implement formal compliance programs, it led to the establishment of a compliance function and the investment of a Chief Compliance Officer. The subsequent flood of new regulations continued to require additional compliance infrastructure, including, the IAA blog says:


  • Formal implementation of codes of ethics;
  • Surprise exams under the custody rule;
  • Pay-to-play, procedures to address identity theft;
  • Narrative disclosures in brochures; and
  • New reporting obligations for advisers that manage private funds.


This does not include a host of new regulations proposed last year awaiting approval, including anti-money laundering requirements, the requirements of Form ADV, and proposals on transition planning, stress testing, and new executive compensation rules expected in 2016.


And this is just the tip of the proverbial SEC iceberg. The Commission also is paying more attention to cybersecurity, gifts and entertainment, social media and more. The US Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA) regulatory regimes will also be active and those with international business lines will face similar regulatory developments globally.


What are YOU paying for compliance?

The IAA estimates smaller advisers would likely pay between $10,000-$15,000 per engagement for limited third-party reviews — more ($50,000 – $100,000+) for larger adviser organizations. And that’s just for the basics. It calls the increasingly expensive regulatory environment “a potential game changer, particularly for the smaller firms that constitute the vast majority of investment advisers.”


Are you and your firm ready? You should be. Are you creating a “culture of compliance?” Have you installed the appropriate processes and procedures to archive necessary documentation, monitor branch offices, track outside business activities, political contributions, complaints, etc. in addition to liquidity management, risk management, transition planning stress test, executive compensation, and on and on and on?


So start now. Start small. Prepare for the deluge

The smart money is already stocking up on compliance umbrellas. You can too. Hire smart people. Develop a compliance playbook. Decide what compliance issues you can handle in-house and what you will outsource. Bottom line: Create policies and procedures, track output, keep archived data safe and your teams compliant.


Be safe. Be secure. Be compliant.

Really! No one is immune from the regulators. No one. And compliance requirements continue to be more all-consuming and more costly. Don’t be penny wise and pound foolish, but don’t be extravagant. Be smart.  Let’s talk. Ask about Patrina’s comprehensive compliance solutions specifically designed for the financial services community.

Let’s talk (212- 233-1155).