Regulators’ Demand for Better Oversight Leads to Increased Outsourcing of Compliance Functions

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Increased scrutiny, more comprehensive exams and focus on investment firm’s compliance departments by regulators has created an evolving trend among many registered investment advisers towards outsourced Chief Compliance Officer (CCO) services. Companies like American Advisory Services are seeing an uptick in consultations as investment firms experience more exams and inquiries.

Increased scrutiny, more comprehensive exams and focus on investment firm’s compliance departments by regulators has created an evolving trend among many registered investment advisers towards outsourced Chief Compliance Officer (CCO) services.

According to Lisa Haag, executive vice president of American Advisory Services, the trend is becoming the new normal in the securities industry as exams and inquiries by regulators like FINRA and the SEC are becoming more about accountability of executives and about the depth of information a firm can provide., Many firms do not have the resources and personnel to keep with regulatory changes, presenting risk to investment firms and brokerage houses, explained Haag. “The regulatory landscape has changed dramatically in the last few years and it is not what your firm says, it is what you can prove, in a very condensed time frame.”

In addition to regulatory changes, Haag included lack of monitoring and adherence to internal policies as a risk to many firm’s compliance programs. Regulators have cited situations in which an effective Compliance Management System (CMS) was lacking across the financial institution’s entire consumer financial portfolio, or in which the financial institution failed to adopt comprehensive policies and procedures or adhere to internal processes., resulting in a significant breakdown in compliance and numerous regulatory violations. Exam reports have indicated that regulators evaluate both the understanding and the application of the firm’s compliance efforts. The “compliance -response” approach will not work. Often, the firm has correct policies and procedures in place, but they were not being followed, monitored or tested. “Having a policy in place without adherence, monitoring and testing sends the wrong message to employees, and more importantly to regulators. It is about as effective as using an umbrella during a hurricane.”

According to Haag, by using the services of compliance specialists, investment advisers can capitalize on the industry expertise of entire companies applied entirely to this one aspect of their business. “The mistake that firms often make is assuming that they will not commit any compliance violations as long as they act properly and ‘do the right thing’” explained Haag, “That is not the case in the securities industry. ‘We tried’ is not good enough.” The SEC requires more than good-faith dealing and does not excuse inadvertent oversight or honest misinterpretation of the rule.

According to Judy Jackson, executive vice president of business development at American Advisory Services, the value of outsourcing is having an outside perspective of best practices and how other firm’s are adhering to regulations. “It sometimes takes someone from the outside to give you new perspective and ideas,” said Jackson. “Often companies have the ‘this is the way we have always done it’ mentality and that gets expensive.” Leveraging a third party is an effective way to manage business critical functions without incurring the expense of full time employees.

About American Advisory Services
With more than 50 years in the Securities Industry, the experts at American Advisory Services provide investment firms and brokerage firms with real-world guidance and filing services to ensure that Registered Investment Advisory firms has the tools they need to always stay in compliance with the relevant FINRA and SEC investment adviser regulations

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Judy Jackson

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