Welcome to Financial Advisor IQ

How FAs Can Heed SEC’s Warning on Compliance Spending

May 15, 2019

The SEC recently signaled that many investment advice firms are too reliant on chief compliance officers and stressed the need to allocate resources to the issue. Expert opinion on what the firms should do varies, but most agree that they need to demonstrate ongoing commitment, according to news reports.

"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," Pete Driscoll, director of the SEC Office of Compliance Inspections and Examinations, said last month at an NRS compliance conference, according to InvestmentNews. "We cannot underscore enough a firm’s continued need to assess whether its compliance program has adequate resources to support its compliance function."

As a ballpark figure, advice practices should allocate at least 5% of their revenues to compliance —and should have “a good reason” if they’re not doing so, Todd Cipperman, principal at Cipperman Compliance Services, tells the publication.

"Compliance is not a fixed thing that stays static as your business changes,” he tells InvestmentNews. “Firms have got to bite the bullet and understand they’re going to have to spend money."

Steven Thomas, chief operations officer and CCO at SGL Financial, tells the publication that rather than sticking with a spending goal, firms should evaluate the variables related to their risk profile, such as whether their advisors use model portfolios or trade on their own. James Hnilo, principal at Sage Wealth Planning, says advice practices also need to take into account their complexity and composition and the compliance officer’s expertise, according to InvestmentNews. And Lisa Kirchenbauer, founder and president of Omega Wealth Management, says determining adequate compliance resources isn’t just about money — it’s also about time, she tells the publication.

Wealth management practices must also be able to demonstrate to regulators that their senior management is truly committed to compliance, G.J. King, president of compliance consulting and software firm RIA in a Box, tells InvestmentNews.

Todd Cipperman

And the best way to do that is to show proof of oversight described in their policies and procedures, according to Thomas, the publication writes.

"What the SEC is looking for is an actual working culture of compliance," Thomas, a former chief compliance examiner in South Dakota, tells InvestmentNews. "You have to have proactive compliance.”

By Alex Padalka
  • To read the InvestmentNews article cited in this story, click here.