Investment advisory firms are dedicating more staff time to compliance to meet growing regulatory demands on the industry.
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survey of 412 investment advisers showed that 92% of them employ at least one person full-time in a legal or compliance capacity, an increase from 78% in 2010.
The poll also revealed the top five areas where firms have boosted the scope and frequency of compliance testing. Advertising and marketing top the list, followed by data security, custody, personal trading and regulatory reporting — which primarily involves the new Form ADV Part 2.
In addition, advisers identified pay-to-play rules, risk management, social networking, valuation and fraud prevention as top compliance concerns. The poll was conducted in April and May by the Investment Adviser Association, ACA Compliance Group and Old Mutual Asset Management.
The increasing complexity of regulations is forcing firms to put more energy into addressing them, according to Kathy Ireland, associate general counsel of the Investment Adviser Association.
“There are more compliance areas that require more time,” Ms. Ireland said.
One example: pay-to-play rules, most of which became effective in March. Under the regulations, advisers are prohibited from making political contributions above a certain amount to candidates who could be in a position to hire advisers for municipal securities or public pension funds.
The rule also bans soliciting donations for a candidate, a practice known as “bundling.” There also is a “look-back” provision which requires that two years of an adviser's giving history be reviewed, a requirement that critics say could make hiring tricky.
Advisers who violate any of the restrictions, and subsequently gain work after making a contribution, will be barred from being paid for providing advisory services to government bodies for two years — the so-called death penalty.
In the compliance survey, 70% of the firms have adopted pay-to-play policies, with 68% applying them to all employees, not just those covered by the rules. All political donations are prohibited by 9% of firms, while 24% limit contribution to between $100 and $350. Pre-clearance for political contributions is required by more than half of the surveyed firms, while about a third request a list of all political contributions as part of the hiring process.
Complying with pay-to-play is “very technical and it involves a lot of personnel issues,” Ms. Ireland said. “The consequences of not complying are very severe. All that adds a level of complexity to internal operations and human resources.”
When asked about how they deal with ADV Part 2 forms, 40% of firms say they have not changed their policies for preparing the form, while 37% say that they are in the process of changing their approach for filling out and filing the document. The form has been changed from a check-the-box format to short answers.
The survey also revealed that firms increasingly are addressing social networking. Indeed, 64% have adopted formal written policies and procedures.
“Placing restrictions is more common that completely barring” social network use, Ms. Ireland said.
She does not attribute the additional attention to compliance solely to the implementation of the Dodd-Frank financial reform law.
“Some of these issues, like Form ADV, have been percolating for years,” she noted.
