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A RISING TIDE OF COSTS
Don't look for compliance costs to fall in this environment. Regulators are expecting more from financial professionals in the areas of surveillance and recordkeeping, and the technology that firms will need to deploy isn't cheap. Tradeoffs result from the tension.
“So as technology increases, that could reduce the overall costs, but you'll have to make an investment in other areas like hiring new staff with diverse skills – maybe coders, or ex-FBI working on counterterrorism, or ensuring you have cybersecurity protections in place,” Schwab's Callison says. Expect more pressure to find return on investment (ROI) on the higher mechanisms required for compliance, and more struggles between CCOs and CEOs on the subject.
Petruzziello says that more regulations and guidance around social media will inevitably boost costs. There is no way around that without restricting use of social media by employees.
“The downside of such restriction is missed exposure and opportunities,” she says. “Balancing risks and costs remains the old but new problem for CCOs and their investment managers.”
Also driving the pressure on the compliance bottom line: regulatory risk from outside the American borders. Firms aren't staying in one nation anymore. And some countries in Asia and Europe are developing an American taste for litigation, perhaps following the examples of attorneys general in many U.S. states.
“Every AG knows that if they find a scandal in the industry, it's a trip to the governor's mansion,” Stettner says. “So there's a lot of pressure on the regulators to not sit back on their heels.”
She stops short of recommending to advisors that they avoid social media in their practices, however – it's still a basic tool that the next generation of investors uses to communicate.
Unfortunately, the CCO struggle with the regulatory landscape is likely to continue. Regulators tend to react to issues as they emerge in the financial industry, rather than set proactive parameters. CCOs grapple with the nuts and bolts of compliance matters every day and can see pitfalls coming more quickly. But it's hard to enforce a best practice in an industry without a mandate from government overseers.
“Even if everyone wants to 'do the right thing' when the revenue upside is seemingly unlimited, the compliance function has a difficult task ahead,” Petruzziello says.
A CHANGING ROLE FOR CCOs
So as the industry changes, expect the demands on the CCO to grow in kind. The job is likely to see broader responsibilities – more matters subject to compliance, and regulators seeking to have an individual in the organization who can be held accountable. The job is likely to have more supervisory tasks, and CCOs will need to be able to do more than just grasp the nuances of the Investment Advisers Act – they also will need to be savvy practitioners of C-suite politics as they rub elbows with the top brass. The goal is to be respected and to influence a culture of compliance at the firm.
Don't look to outsourcing compliance as a way of significantly containing costs. Some minor responsibilities can be farmed out, but core compliance functions are always the obligation of the company itself. FINRA offers rules on what can be outsourced; the SEC already is balking at some oversight going overseas, where records could be out of their reach. The good news: Tech solutions can help lessen the burden of chores such as documenting client communications.
At the same time, the CCO must be true to his or her mission. It is the responsibility of the compliance officer to ensure that compliance violations be disclosed, even those that damage the firm's reputation. Bad investment performance can hurt the firm's brand, but a CCO must make certain that it is reported accurately and not in a misleading manner.
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