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."


What do you think?

View comments

Upcoming event

Oct 22


San Francisco Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Most watched


Young professionals see lots of opportunity to reinvent the advice experience

Members of the 2019 InvestmentNews class of 40 Under 40 have strategies to overcome the challenges of being young in a mature industry.


Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.

Latest news & opinion

Wall Street lashes out at Sanders' plan to pay off student debt with a securities trading tax

Financial pros argue that a transaction levy will hurt mom-and-pop investors along with investment houses.

GPB paid B-Ds and reps steep commissions to sell troubled private placements

GPB paid commissions of 9.3%, or $167 million altogether, on the firm's private placements.

Give us a break, active managers say

Seven portfolio managers share their outlooks for the rest of the year, generally agreeing that it's been hard for active managers to stand out.

GPB Capital reports decline in value of two biggest funds

One has dropped by 25.4% and the other by 39%, according to the company.

6 ways Social Security will change in 2020

As the enormous baby boomer generation continues to march toward retirement, they are straining the resources of Social Security. Here are six ways that the nation’s primary retirement income program will change in 2020.


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 It'll help us continue to serve you.

Yes, show me how to whitelist

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


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print