What keeps Investment Adviser Association members up at night?

Failed to track pesky OBAs? FINRA’s not laughing!
June 22, 2016
What if you have no books or records?
July 7, 2016

According to the Investment Adviser Association’s (IAA) 2016 Investment Management Compliance Testing Survey (conducted in conjunction with ACA Compliance Group and OMAN), the cost of compliance, conflicts of interest, oversight of third-parties, and social media are all top of mind. This is after, of course, the usual evils that plague a Chief Compliance Officer’s (CCO) heart, like anti-money laundering, bribery challenges, corruption, and cyber-security.

No money in the budget

Among the noteworthy findings reported in the survey last month was that 61% of investment adviser firms do not maintain a specific budget for compliance-related resources. Worse yet, a slight majority of those surveyed (51%) report that compliance accounts for under five percent of their firm’s total revenue. Most of that (88%) are internal personnel costs, outside vendors (35%), technology (33%), and third-party consultants (30%).

What does that mean in real dollars?

Of the 35% or so firms that have established a compliance budget, 48% reported spending between $100,000 and $500,000 in compliance-related costs. While most of that was invested in personnel (salary + benefits), 59% of those surveyed reported they hired a third party to conduct their compliance reviews, 40% of which were mock SEC-type exams.

How much did those independent, third-party compliance reviews cost?

Compliance Spend % of respondents
<$250K 2%
$100K – $250K 7%
$5K – $100K 18%
$40K – $50K 8%
$30K – $40K 11%
$20K – $30K 14%
$10K – $20K 25%
>$10K 14%

Most attention was paid to marketing and advertising. 54% of respondents said this was the area for which they primarily hired outside consultants. 14% retained outside support to review electronic communications.

What about conflicts of interest?

Nearly all respondents report they have a gifts and entertainment policy, but only 53% require pre-approval for threshold amounts between $10-$1,000. And when it comes to political contributions, 52% of respondents say they require Covered Associates to pre-clear all political contributions, while 32% demand only periodic (unspecified) reporting. 10% actually prohibit all political contributions entirely, while 11% prohibit contributions at the state or local level. Many also require oversight of non-covered personnel’s political contributions.

But what about “indirect” political contributions?

36% say they have policies and procedures in place to oversee political contributions by family members or other household members, or personally-owned companies. 26% report policies and procedures in place governing indirect contributions via payments to PACs and to state and local political parties. But 38% have no such oversight in place to cover indirect political contributions.

What about you?

Are you one of the 38% not tracking indirect political contributions, or one of the 32% who only invest in periodic reporting? What about your electronic communications, your marketing, and the rest of your non-trading compliance exposures? Who’s minding your store?

You know the regulators expect you to create a compliance infrastructure that keeps up with your members in the real world. It’s not enough to simply collect and store information, you’ve got to have some strategy for oversight. You need a system in place that fully supports reporting requirements; pre-empts the tracking and addressing of compliance breaches; and anticipates regulatory requirements

No one is immune from regulation

If you are charged with compliance, you know you’re facing increased oversight which requires you to juggle more paper, more files, more data. Regulatory compliance requirements are getting more all-consuming and complying can often times feel like an undertaking without end. If your compliance function is under pressure to do more with less, what are the options?

Let’s talk (212-233-1155). Ask about Patrina’s comprehensive compliance solutions and compliance recordkeeping specifically designed for the financial services community.

Let’s talk.

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