Josh Ballard
Content Marketing Manager

A risk alert recently published by the Office of Compliance Inspections Examinations (OCIE), part of the U.S. Securities and Exchange Commission (SEC), has highlighted a number of glaring compliance deficiencies and weaknesses exhibited by investment advisers in the U.S.

While major issues were found regarding advisers’ ability to conduct annual reviews and implement effective policies and procedures, they appeared to stem from a worrying disregard for the role of compliance and that of the chief compliance officer (CCO).

Firms Are Providing Inadequate Compliance Resources

OCIE staff found that advisers do not devote adequate technology, training and staff to enable an effective compliance program. A key concern is that although firms have a CCO in place, they are often stretched across wide-ranging responsibilities leaving little time for their core compliance requirements. 

In fact, the alert also concluded that, in general, more staff are needed for the compliance team to function properly. At present, policies and procedures such as annual reviews and accurate reporting cannot be implemented properly as there simply aren’t the resources to do so.

Many of the advisers observed by OCIE had grown significantly in size in recent years and it is suggested that these failings are a by-product of their inability to scale their compliance efforts in accordance with the complexity of their business. Advisers are failing to adopt the latest compliance technology that would enable them to monitor for risk to the satisfaction of the SEC.

Chief Compliance Officers Lack Sufficient Authority

Another damning indictment found in the risk alert is a perceived lack of authority possessed by CCOs. OCIE staff highlighted that CCOs are routinely denied access to important compliance materials “such as trading exception reports and investment advisory agreements with key clients.”

CCOs are often given restricted access to the senior management team meaning they are kept out of the loop regarding high-level business decisions that may have significant regulatory repercussions. Even when senior management and employees discuss matters related specifically to compliance, CCOs are rarely consulted.

Firms Must Empower Their Compliance Function

Speaking at the SEC’s National Investment Adviser/Investment Company event last week, OCIE Director Peter Driscoll urged firms to empower their CCOs with “full responsibility and authority to develop, implement, and enforce appropriate policies and procedures…”

While it’s clear that some firms still regard the compliance function as a burdensome necessity, Driscoll outlined the value a CCO can provide for a firm beyond merely protecting it from compliance breaches.

Driscoll added: “A good CCO can be a true ‘value-add’ to the business; by keeping up with regulatory expectations and new rules, they can assist in positioning their firms not only to avoid costly compliance failures, but also provide proactive compliance guidance on new or amended rules that may provide advisers with additional business options.”

It is clear that the SEC is taking a hardline stance against what it sees as a continued failure by firms to adhere to compliance standards. Just last month, they issued a US$400m penalty to Citigroup for “several long-standing deficiencies” in its compliance program.