There is no doubt, complying with the myriad rules and regulations of the Securities and Exchange Commission (SEC) or state regulatory bodies requires significant investment in both time and money. For SEC-registered firms, the cost can be quite high, depending in part, on factors like what types of products and services they offer.
Because of this steep cost, some compliance teams, particularly those who serve firms which have not experienced significant regulatory concerns, may see reluctance or even resistance to funding the compliance program from senior leaders who see the chief compliance officer’s (CCO) efforts as a drain on firm profits.
However, this kind of attitude is extremely short-sighted. As experienced compliance professionals know, a lack of regulatory violations does not always mean the firm and its personnel are managing regulatory compliance risk as effectively as possible. In fact, there can be significant issues which have simply not yet been detected. Issues, which when left unaddressed, could cost the firm much more than it would have cost to prevent them or detect them in their earliest stages.
How the cost of noncompliance impacts your investment firm’s operations and compliance program
Just this past fiscal year, the SEC issued $8.2 billion in financial remedies across 583 enfrocement actions. Common themes noted by the regulator included:
- Off-channel communications
- Marketing Rule compliance
- AI and emerging technologies
- Material non-public information
It is important to note however, noncompliance impacts much more than your investment firm’s financial accounts. It can cause:
- Business disruption
- Loss of revenue
- Low customer trust
- Operational expenses related to “clean-up” efforts
And when it comes down to it, these costs can exceed regulatory fines and penalties.
When the Benefits Outweighs the Cost: Investing in Your Compliance Program
As COMPLY Chief Product Officer, David Bliss, put it, “The good news and bad news, depending on how you view it, is that regulators’ expectations around how you comply will vary based on multiple factors.
So what does this mean? Either you must have a deep understanding of the rules and how they impact your firm, or you must partner with someone who will be able to translate the rules into the specific requirements for your firm based on your size, firm type, and unique risk profile.
However, it doesn’t end there. I’ve said it before and I’ll say it again, a compliance program is not one and done. Compliance teams must think long-term, incorporating ongoing practices like annual reviews, continual assessments of their risk profile, changes to Policies and Procedures…and the list goes on.
To support that kind of day-to-day functionality, I believe every firm requires a program management support structure. Of course, the level and scope of detail will vary widely depending on many factors, but even one-person shops require that backbone of support to stay on track and keep compliance tasks on target. Without a support structure, whether a system, partner or both, revenue generating activities will always take precedence, pushing compliance to the back burner.
When assessing a partner and determining the “right time” for investment in automation, I always say look to the dollar and cents. Assess the return on investment, and only make the leap when that return is clear, when the cost both in money and in resources spent deploying and configuring a new system is outweighed by the benefits. For instance, I would never recommend a complex system with intricate rules and tools for a smaller shop simply looking to manage their Code of Ethics because inevitably it would be overkill in terms of resource cost even if the annual fee is manageable. For a multinational firm that must contend with multiple jurisdictions and different needs across its entities, however, that complex system might make perfect sense. It’s all about the return.”
Beyond investing in a technoligical compliance support structure, firms should also consider:
- Investing in your compliance staff.
As the rules become more complex, experienced compliance staffers are increasingly in demand. While some investment advisory firms are apprehensive about investing so much into their compliance team, it’s much better to invest proactively in the front end, than have to cover the costs of compliance violations on the back end. - Performing regulatory audits multiple times a year.
Similarly, making your regulatory audits more of an ongoing affair rather than a once-a-year drill can reduce risks and costs. When firms have the tools they need to conduct effective internal audits, they can identify potential compliance risks before those issues become significant and costly. - Offering compliance training to employees.
Effective compliance training can also result in cost-savings for firms. This can help create a culture of compliance at your firm and avoid risks of noncompliance which could cost the company.
The ever-changing regulatory landscape means investment firms cannot afford to become complacent about their compliance efforts. Although a firm may have approved a one-time resource expenditure years ago to update its compliance program, risks are rapidly evolving and your compliance program should be too. Firms which simply adhere to the status quo because the status quo was once sufficient may regret their decision when problems ultimately arise.
Ready to see why thousands of firms rely on COMPLY to help navigate compliance requirements and ensure they don’t end up on the wrong side of the regulator? Let’s talk.
This blog was originally published December 2022 and was last updated December 2024.
