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Small firm compliance chiefs wearing too many hats?

SEC's Walter warns that at smaller shops, compliance can fall between the cracks

Apr 18, 2013 @ 2:47 pm

By Liz Skinner

compliance, regulator, regulation, elisse walter
+ Zoom

Small financial advisory firms should take a fresh look at the strength of their compliance programs since at least one Securities and Exchange Commission official seems unsatisfied with their efforts.

In a speech to the North American Securities Administrators Association Inc., which oversees small and midsize financial advisers, SEC member Elisse Walter suggested that the chief compliance officers of small firms may be overseeing too much to give compliance its proper due.

“In small shops, chief compliance officers can wear many different hats,” she said Tuesday. “Often, this means they can have too many priorities on their plates to devote adequate time to compliance efforts.”

Specifically, she said CCOs may be balancing costs, privacy and investment strategies at the same time they must be monitoring trades, marketing, investment suitability, communications with clients and other compliance responsibilities.

Ms. Walter, who served as SEC chairman from the time former chief Mary Schapiro stepped down last December until this month when Mary Jo White was installed, even suggested that clients may be too trusting of a small firm and hesitant to report misconduct of advisers when they regularly see them “on the Little League sidelines, at church or at a monthly businessperson's lunch.”

Securities compliance expert Todd Cipperman questioned whether smaller firms really represent increased risk, noting that Ms. Walter did not offer any empirical support for her assertions. However, he said, firms should keep in mind this “inherent bias of securities regulators when they show up for an examination.”

A case the SEC settled this week with a Chicago investment adviser began when a commission examiner questioned why the firm's biggest client, the California Public Employers' Retirement System, had stopped being a client.

The investigation led to an administrative complaint and $120,000 in fines and restitution against the firm's president — who was also its chief compliance officer — for telling the California pension fund giant that it had at least $200 million in assets under management, when it really had about $80 million.

Another issue Ms. Walter questioned in her speech was small firms' use of “off the shelf” compliance programs that aren't tailored to their businesses.

One company, National Regulatory Services Inc., focuses on helping firms to customize its tools for their firms. This week, it announced a new product called Policy Architect to allow advisers to add unique content to its compliance manuals.

While Ms. Walter seems concerned with the comprehensiveness of off-the-shelf software, a survey last summer suggested that an even more worrisome issue is the number of firms that aren't using any software at all to track and comply with securities regulations.

A July 2012 InvestmentNews survey on technology use showed that about 68% of advisers don't use any compliance software.

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