Too many asset managers isolate their internal watchdogs from the day-to-day operations they need to observe first-hand. An integrated approach will impress the regulators and make the whole process run more smoothly.
Whether they recognize it or not, many asset management firms keep their compliance personnel from doing their jobs.
They don’t mean to hide anything from their people, but by keeping them at arm’s length, it boils down to the same thing.
Our CEO James Carney recently had an intensive discussion about this with Gary Davis, who heads the practice management team at MarketCounsel.
Gary argues that integrating compliance into the rest of your operation is the best way to satisfy regulators that you’re making sure all the rules are being followed.
Break through the silos
“I often hear firms discuss compliance and operations as two separate departments,” Gary says.
“But I feel you need to look at things more holistically and have a culture of compliance, especially with today’s heightened regulations.”
While the phrase “culture of compliance” can become glib corporate jargon in the Dodd Frank world, what Gary is talking about here is more a matter of tearing down the wall between compliance and everything else your firm does.
It’s actually a revolutionary concept and I’d like to spend this week and next spinning out exactly what it really means.
If compliance is something separate from the trading, research, client communications and reconciliation — just to name a few functions — then compliance will always be one step behind.
That’s the kind of mentality that forces your compliance officer into a reactive role, dealing with problems only after they’ve gotten too big to avoid noticing.
And besides, as Gary points out, treating compliance as an add-on task that follows all the “real” work only encourages your staff to treat their regulatory responsibilities as an afterthought.
They might flawlessly check off every task in the manual, but at best it will only be a question of routine, not second nature.
Having compliance personnel involved in the development and maintenance of operations manuals, trading workflow and even the creation of marketing materials ensures that the rules will remain in force as your firm evolves.
Otherwise, the compliance team has to clean up inadvertent conflicts after they’ve had a chance to become entrenched in the firm’s operational patterns — and retraining staff costs time, money and morale.
Bringing compliance in at the end also increases the likelihood that they’ll have to bounce finished work back for revisions or worse, be unable to weigh in before something goes out that would raise eyebrows at the SEC.
The reverse of normal practice
My feeling is that many firms drag their feet before getting compliance involved simply because compliance can such a source of anxiety if not outright dread.
Too often, compliance is cast in the role of the bad cop, the disciplinarian, the dentist.
It’s true that a compliance officer needs to be tough, but as with the dentist, too much fear means that appointments get delayed or skipped altogether, leaving potential problem areas to fester.
Gary Davis tells me that the compliance team’s job really boils down to making sure your firm is ready for a formal SEC audit at any time.
That means that unlike the bad cop or overly strict disciplinarian, they’re always on your side — provided of course that you and your people want to do the right thing.
Moreover, compliance staff will be the primary point of contact with the regulator if and when questions arise.
The SEC will want to see more than a record that shows that all required tests, meetings and reviews were conducted on schedule and that steps have been taken to resolve any problems that were detected.
“It is important not to leave the examiner guessing,” Gary explains.
“Many times when I ask a firm for their execution review documents, they show me a form that says they are using a certain custodian, have reviewed their reports and they continue to be a good custodian. This doesn’t tell the examiner anything.”
Letting your compliance officer sit in on the process helps him or her take the kind of notes the SEC actually needs on what was discussed, how decisions were made and how remediation plans were put together.
After all, trained compliance professionals know how the SEC thinks better than anyone else. That’s their job and their specialized expertise.
And if they can bring that expertise to bear on the way your firm documents its errors and the way it rectifies them, so much the better.
Gary flags trading, execution and complaint logging as areas where most asset managers would benefit from letting compliance out of the box and into the day-to-day workings of the firm.
He’s full of practical suggestions here and I suggest you download the report to see them.
How to turn your team loose
For me, I can’t help but note that the compliance team is almost always stretched extremely thin. They can’t be everywhere.
If you choose to imbed them into the operational side of things, they’re going to be even busier.
Naturally, the more you can automate the tasks that can be automated — trade reconciliation, execution review, model portfolio drift — the more time they’ll have to watch, record and weigh in on qualitative matters like communications, training and ethics.
I know for a fact that our technology can help with that and generate an error-free record to show the examiners as well.
Odds are good your clients will appreciate it, too, because after years of scandals, they’re no more willing than the SEC to countenance regulatory laxness.
So stop thinking of your compliance officers as forensic detectives trying to piece together problems after the fact.
Think of them as your canaries in the regulatory coal mine. If they get nervous, you have time to take measures.
But the compliance canaries can’t do their job if you don’t let them into that coal mine.
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