The Rising Focus On Compliance

By Author: Jai Prakash Srivastava
Total Articles: 304
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Five factors have combined to create a dramatic increase in the focus on compliance management in recent years for investment advisor firms.
1. High profile accounting irregularities.
2. Heightened media and political scrutiny.
3. Increased SEC enforcement activity.
4. Raised expectations on the burden of proof of compliance.
5. Shift to longer, more detailed SEC examinations.
Consequently, there is a greater need for a comprehensive compliance monitoring system that can meet the increasing demands on compliance oversight.

A Standard Compliance Program
Customization to the Firm
Many industry professionals find it difficult to understand why compliance management cannot be a check the box process. There are two key factors why this does not work well:
(a) Principle-based Regulations
Many compliance regulations are not definitive. They espouse principles such as an investment advisory firm should act to protect the best interests of its customers at all times.
(b) Product Specific Regulations
Firms have various products that they distribute in multiple ...
... ways. Various rules do not apply to them depending on how they conduct their business.
Planned Activities
Consequently, a legal or compliance professional is often hired to create the compliance program appropriate to a firm. The key documents that are created are the compliance policies and procedures of the firm. Operations personnel often then create compliance procedures to support these policies and employ systematic processes to conduct and monitor those procedures.
Unplanned Activities
In addition to the monitoring of planned compliance activities via policies and procedures in a compliance program, a process must be maintained for unplanned cases or compliance issues that arise and must be monitored through resolution. The activities and data gathered in these cases often tend to be in the heads of those who conducted the compliance monitoring and Issue resolution. Moreover, they often can't be retrieved when the time comes to demonstrate the actions to the appropriate regulatory compliance bodies or legal analysts.

Historical Antecedents of IT for Compliance Management
Traditionally, investment advisor firms have appropriately focused their compliance IT expenditure on supporting investment process or areas where savings can be achieved in operational or product distribution/customer servicing. However, IT expenditure on compliance within operational systems has been low as its characteristics are less conducive to system development. The rules and associated processes are volatile (changing compliance requirements), data to be gathered and maintained is very diverse (lacks consistency), and the activities are infrequent relative to daily trading and valuations

Volume
Investment advisor firms often have few employees and consequently a relatively lower volume of compliance activities. As a result, the systems being used have been paper, Excel, reminders in Outlook, etc. Larger firms with greater numbers of employees and subsequent higher volumes of compliance activities have purchased and implemented specific systems in the past. However, these have often been in reaction to a new compliance rule, or an identified deficiency that had to be plugged. They have ended up with a variety of compliance solutions even though their needs across those systems are similar. This variety of systems has created different kinds of difficulties.

In summary, companies have often tended to implement an IT system when they have enough volume to cause
(a) Discomfort with the manual compliance processes
(b) Significant external change in compliance rules or identified deficiency

Smaller firms have not implemented compliance systems because manual processes have not been sufficiently encumbering to justify the expenditure. Larger firms have put in automated systems but budgets have usually only extended to fixing the particular pain or hole as a larger integrated compliance solution is cost-prohibitive.

A New Solution for Investment Advisory Firm Compliance Monitoring
Investment advisory firms need a comprehensive compliance solution that:
(a) Monitors all planned compliance activities (equating to the procedures inherited from the policies)
(b) Monitors all unplanned compliance cases through to resolution.
(c) Requires little or no compliance system maintenance or implementation costs
(d) Provides them with the specific industry functionality they need to further reduce implementation costs.
(e) Is flexible for a company's own compliance program and its suite of products

The compliance system needs to be a hosted solution in order to minimize implementation costs and to enable access to a larger range of firms. Further, the hosted compliance solution needs to be provided by a company that customers can trust with compliance data.

Find more information relating to compliance management NASD Compliance, and FINRA Compliance,SEC Compliance here.