Mutual fund companies are starting to slow the pace at which they hire legal and compliance officers, according to several industry experts.
With the mutual fund scandals receding into the past, such a trend was inevitable, they said.
PHILADELPHIA — Mutual fund companies are starting to slow the pace at which they hire legal and compliance officers, according to several industry experts.
With the mutual fund scandals receding into the past, such a trend was inevitable, they said.
Responding to the scandals and the regulatory measures that followed, many fund companies have moved from implementing new legal and compliance programs to “refining” them, said Audrey Tally, a partner with Drinker Biddle & Reath LLP of Philadelphia.
Less demand, however, doesn’t mean that fund companies will be able to get legal and compliance officers on the cheap, she said.
As they refine their legal and compliance programs, asset managers are interested in executives with experience, Ms. Tally said.
And executives with experience demand higher salaries, several recruiters said. It’s a potential problem for mutual fund companies.
Hedge funds can pay their legal and compliance officer more than $1 million a year, followed by broker-dealers, who can pay between $800,000 and $1 million, said Glenn Buggy, a partner with CTPartners, an executive-search firm in Boston.
Mutual fund companies pay less, but the gap is starting to close, he said.
The costs, however, may be too much for some fund companies to take.
“The potential cost burden … is not inconsequential,” Geoff Bobroff, a mutual fund industry consultant in East Greenwich, R.I., said about maintaining legal and compliance units. As a result, smaller fund companies that don’t have the resources may find it necessary to cut back on their legal and compliance efforts, he said.
But don’t count on it, said Neil Hennessy, president of Hennessy Advisors Inc. of Novato, Calif.
“With the time and expense that went into building the [legal and compliance] program, you might as well keep it,” he said. “I don’t know what you can achieve by cutting back.” At larger fund firms, however, cuts might make sense, Mr. Hennessy said. “At a larger firm, once policies and procedures are in place, do you need all the people to make sure you’re in compliance? Probably not,” Mr. Hennessy said.
But it wouldn’t be in any fund company’s best interest — no matter what the size — to cut back its legal and compliance programs, industry experts said.
In response to a recent InvestmentNews poll asking readers if the mutual fund industry had learned a lesson from the mutual fund trading scandal, 55.2% of the 201 respondents said no.
Cutting legal and compliance programs would only strengthen that impression, said Jim King, an adviser with Balasa Dinverno & Foltz LLC in Itasca, Ill.
And it could draw the attention of the Securities and Exchange Commission, Mr. Bobroff suggested.
“The SEC won’t look favorably upon contraction,” he said.
The mutual fund scandals may be receding into the past, but there still are other issues for which mutual funds need a strong legal and compliance program. One such issue: More funds than ever are using complicated derivatives, Mr. Bobroff said.
It’s an issue Andrew J. “Buddy” Donohue, director of the division of investment management at the SEC, said was a concern. Many fund firms’ compliance systems may not be “sophisticated” enough to handle such investments, he said last month at a meeting sponsored by the Investment Company Institute of Washington.
Hedge funds, many of which pioneered the use of derivatives, appear to have gotten the message.
Even though a rule requiring hedge funds to register as advisers was struck down by the courts last year — a rule that would have required hedge funds to have legal and compliance procedures — many hedge funds still are in the market for legal and compliance staff, said Kate Dressel, president of Strategic Compliance Solutions LLC in Essex, Conn.
Eye on compliance
“I don’t know of many [hedge funds] that are ignoring the need for compliance,” she said.
Some of her clients have “deregistered” as a result of the SEC rule’s disappearance, but Ms. Dressel said they still see the need for legal and compliance programs and have not cut those programs back.
“I think once such compliance is in place, it’s not an onerous process,” she said. “These firms feel good about having these in place, and it looks good to investors.”
Ms. Dressel had to admit, however, that the appetite for legal and compliance officers isn’t as ravenous as it was when it looked like hedge funds would be required to register.
Just because hedge funds, mutual funds and others aren’t hiring at the pace they were, however, doesn’t mean they will stop hiring, said Jack Kelly, a managing director with The Compliance Search Group LLC, an executive search firm in New York
Although it’s true the demand for legal and compliance officers may not be as “frothy” as it once was, there still is a great deal of demand for executives with experience, he said.
