How much is enough compliance? SEC grumbles about firms' efforts to cover risks

One consultant suggests spending 5% of revenue to fully address compliance needs

May 13, 2019 @ 4:34 pm

By Mark Schoeff Jr.

The Securities and Exchange Commission is warning investment advisory firms to devote adequate resources to compliance, which has spurred a debate about whether attitude or money is more important.

In a recent speech, Pete Driscoll, director of the SEC Office of Compliance Inspections and Examinations, said the agency is noticing that compliance budgets are being cut or are not commensurate with firms' risk profiles.

He also said chief compliance officers are bearing the full burden for ensuring a firm follows the rules. That indicates insufficient "tone at the top" from senior leadership making compliance a priority.

"We see on examinations competent CCOs that are not empowered to live up to the role that the commission described in the adopting release of the [Investment Advisers Act] compliance rule," Mr. Driscoll said in an appearance last month at an NRS compliance conference. "We cannot underscore enough a firm's continued need to assess whether its compliance program has adequate resources to support its compliance function."

Todd Cipperman, principal at Cipperman Compliance Services, suggests advisory firms should spend at least 5% of revenues on compliance. That benchmark will ensure ample investment as the firm grows.

"If you're not spending 5%, there should be a good reason for it," he said. "Compliance is not a fixed thing that stays static as your business changes. Firms have got to bite the bullet and understand they're going to have to spend money."

But Steven J. Thomas, chief operations officer and CCO at SGL Financial, said a 5% spending goal won't work for every firm. Variables, such as whether advisers do their own trading or use model portfolios, should determine the compliance allocation.

"It would be pretty tough to put a benchmark across the board because compliance expenses should be directly related to the risk profile of the firm's business model," he said.

James Hnilo, principal at Sage Wealth Planning, said the complexity and composition of a firm as well as the expertise of the compliance officer can influence spending. He handles compliance for his newly established two-person firm.

"One size does not fit all," Mr. Hnilo said. "I do [compliance]; I have 20 years' experience in the area. I haven't figured out what I spend because it comes down to my time."

Lisa A.K. Kirchenbauer, founder and president of Omega Wealth Management, said 5% of revenue seems like a big number. But adequate compliance doesn't depend solely on how much is invested in the function.

"I would say it's not just money, it's time," Ms. Kirchenbauer wrote in an email. Compliance "is something we are actively focused on, and it's a challenge as a smaller firm but completely necessary."

A firm's leaders have to show a commitment to compliance to satisfy the SEC, said G.J. King, president of RIA in a Box, a compliance consulting and software firm.

"An engaged senior management that clearly prioritizes compliance will be much more compelling during an [SEC] audit than a stack of compliance-related invoices," Mr. King said. "You can hire the most competent CCO in the world, but if you don't empower that person and make him or her a senior leader in the firm it's not going to suffice. It's just window dressing."

The best way a firm can demonstrate a compliance culture is to show the SEC how it brings its compliance manual to life, according to Mr. Thomas. For instance, match cybersecurity policies and procedures with evidence of oversight of emails, text messages and social media.

"What the SEC is looking for is an actual working culture of compliance," said Mr. Thomas, a former chief compliance examiner in South Dakota. "You have to have proactive compliance. They want to know there is someone at the firm monitoring things on a daily basis."

0
Comments

What do you think?

View comments

Upcoming event

Nov 20

Conference

Future of Financial Advice

An innovative conference dedicated to improving the client experience by enhancing digital technology, mainstreaming healthcare and optimizing wealth management strategies.The Future of Financial Advice will provide a forum for... Learn more

Most watched

Events

Jim Crowley, a new sheriff in town?

BNY Mellon Pershing's new CEO as of July 1st, Jim Crowley, discusses his vision for the future of the company.

INTV

How the 2020 elections could impact ESG investing

Joseph Keefe, president of Impax Asset Management, on the elections and how advisers can build a bridge to the next generation of clients with ESG investing.

Latest news & opinion

Departure of Alexander Acosta could slow DOL effort to revise fiduciary rule

Acting secretary Patrick Pizzella will have to make political decision to move ahead.

SEC member Peirce to brokers: Talk to us early, often about Reg BI implementation problems

She's willing to advocate for additional compliance time if firms have made a good faith effort.

Hub in talks to buy $40 billion LPL branch Global Retirement Partners

GRP, an LPL super-OSJ, would represent the latest in a flurry of acquisitions for Hub.

David Lerner Associates' financial condition deteriorates

Firm reported 'negative net worth' of $17 million last year in recent SEC filing.

Why healthy clients need to save more for retirement

Tax-free health savings accounts, Roth IRAs, insurance and annuities can help cover retirees' future health-care costs.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print