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."
