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The Friday List: 10 Things to Know about the DoL Fiduciary Rule

Today, we offer our “Friday List,” an occasional feature summarizing a topic significant to investment management professionals interested in regulatory issues.  Our Friday Lists are an expanded “Our Take” on a particular subject, offering our unique (and sometimes controversial) perspective on an industry topic.

Last Monday (May 22), the Department of Labor issued guidance on the implementation of the long-debated Fiduciary Rule.  Most significantly, the DoL did not further delay the basic concept that financial institutions and advisers must apply a best interest standard to advice for IRAs and other retirement accounts.  However, the DoL did back off of some of some of the compliance requirements for the rest of this year and plans to collect more information.  Below is a list of the 10 things you need to know right now about the DoL Fiduciary Rule.


10 Things to Know about the DoL Fiduciary Rule


  1. Applies to IRAs: The DoL Fiduciary Rule applies to investment advice concerning IRAs, ERISA plans, and plans covered by Section 4975 of the Tax Code.
  2. Best Interest standard starts June 9: Beginning June 9, financial institutions and advisers to covered plans must provide advice in the retirement investor’s “best interest,” which includes a duty of prudence and loyalty.
  3. BIC exemption compliance starts January 1: The extensive compliance requirements of the Best Interest Contract (BIC) exemption, which would apply to non-level fee products, are not required until January 1, 2018.
  4. DoL expects changes by January 1: During the Transition Period (June 9-January 1), the DoL will collect additional information from the industry to determine how compliance practices such as the use of mutual fund “clean shares” should re-shape the Rule.
  5. Proprietary products with commissions permitted: During the Transition Period, firms can recommend proprietary products with commissions so long as they satisfy the best interest standard.
  6. Need policies and procedures: The DoL expects firms to adopt policies and procedures necessary to ensure compliance with the best interest standard.
  7. Robo-advisers can rely on BIC exemption: Robo advisers may rely on the BIC Exemption during the Transition Period to ensure compliance with the Rule.
  8. Investment advice narrowly defined: Investment advice, for purposes of the Rule, does not include plan information or general financial, investment and retirement information.
  9. Can rely on written representations from intermediaries: The Rule does not apply if an independent fiduciary provides written representations (including negative consent) that the fiduciary is a bank, insurance company, BD, RIA, or independent fiduciary managing at least $50 Million.
  10. DoL will focus on compliance over enforcement: The DoL says it will prioritize compliance over enforcement during the Transition Period so long as firms work diligently and in good faith to comply with the Rule.

The Friday List: 10 Ways Compliance Contributes to Firm Value

Today, we offer our “Friday List,” an occasional feature summarizing a topic significant to investment management professionals interested in regulatory issues.  Our Friday Lists are an expanded “Our Take” on a particular subject, offering our unique (and sometimes controversial) perspective on an industry topic.

Senior executives may view spending on compliance as a necessary evil or a cost of doing business.  While compliance spending is certainly necessary and a cost, the compliance function, properly structured and implemented, can significantly contribute to a firm’s value.  We believe the added value can actually exceed the cost, and compliance spending can be viewed more broadly as an investment in the business.  So, for today’s list, we offer 10 ways that compliance contributes to firm value.


10 Ways Compliance Contributes to Firm Value


  1. Avoid Fines and Penalties:  All firms want to avoid the punitive and unplanned fines, penalties, and disgorgement associated with enforcement actions that a good compliance program can prevent.
  2. Protect Individual Reputations:  The SEC names a corporate officer in over 80% of enforcement actions.  Your name in an enforcement action could be career-ending, especially if you are barred from the industry.
  3. Attract Institutional Clients: Most institutional investors conduct Operational Due Diligence that includes an in-depth review of the compliance program.  A weak compliance program can disqualify a firm regardless of investment performance history.
  4. Increase Firm Multiple: Potential acquirers will assess a firm’s compliance program as a factor in the multiple offered.  An inadequate compliance program means more risk, and more risk means a lower multiple.
  5. Improve Operations:  Very often, the compliance procedures serve as a starting point for operational and desk procedures.  Also, the discipline of drafting and implementing procedures will serve as an example for finance, portfolio management, and product development.
  6. Reduce Executive Time:  Fewer compliance problems and the associated decline in operational problems means less time spent by executives dealing with non-productive headaches.
  7. Lower Legal Expenses:  A good compliance function will reduce the number of questions requiring outside counsel.  Firms will incur significant legal expenses when confronted with an avoidable enforcement action.
  8. Preserve Reputation:  An enforcement action undermines a firm’s reputation, the most valuable asset of any investment management firm.  Blue chip firms like to do business with other blue chip firms that have a reputation for integrity.
  9. Attract Employees: A quality compliance program will create a credible firm attractive to quality employees.  A “cowboy culture” will repel the top-notch employees needed to grow into an institutional franchise.
  10. Freedom from Fear:  You wouldn’t drive a car without good brakes.  Just like good brakes, a good compliance program allows firm management to move fast and seek new opportunities without fear of an unknown regulatory breakdown.

The Friday List: 10 Factors for Hiring a Compliance Consulting Firm

Today, we offer our “Friday List,” an occasional feature summarizing a topic significant to investment management professionals interested in regulatory issues.  Our Friday Lists are an expanded “Our Take” on a particular subject, offering our unique (and sometimes controversial) perspective on an industry topic.

Many investment managers and boards struggle with the factors to consider when retaining a compliance consulting firm.  They mistakenly assume that all compliance firms are the same.  However, much like hiring any other professional service that seems inscrutable, compliance services firms can be analyzed by specific and objective characteristics.  Below, we offer some guidance on how to evaluate a compliance consultant.   Also, we offer a form of RFP for retaining a compliance consulting firm.

10 Factors for Hiring a Compliance Consulting Firm

  1. Size:  The sheer size of the firm makes a difference.  A firm with more than 10 consultants will offer more knowledge, experience, depth, and services than a firm of 1-5 people.
  2. Employee Experience:  Is the firm hiring senior professionals or newbies?  Do they focus on former regulators or experienced business people?  Is there a hiring philosophy that you can rely on, or are you just hiring the person in front of you rather than the firm?  Employee turnover is a fact of life, so make sure you hire a firm that will offer consistency notwithstanding a particular employee.
  3. Services:  Some firms offer holistic, ongoing services that may include providing a chief compliance officer.  Some firms only provide mock audits.  Inquire what the firm provides most of its clients.  Also, ask about the testing program.  How much time does the firm spend on testing activities?  What does the report look like?  Does the firm conduct interviews, review documents, engage in forensic testing, and sampling?
  4. Clients:  Does the firm provide services to your industry?  The investment management industry includes mutual fund managers, private equity firms, institutional money managers, family offices, and fintech companies.  Does the compliance consultant have the relevant experience?  How many clients does the firm serve?
  5. SEC Exam Experience:  Don’t assume that every compliance consultant has actually managed an SEC exam.  Also, ask about results.  Most reputable firms will not guarantee a perfect exam, but an experienced firm should be able to describe how it improved possible outcomes.
  6. Service Model:  Compliance consulting is a professional service.  Does the firm offer just one person or a team (which softens the impact of turnover)?  Will they engage proactively without you calling first?  Will they charge for every interaction (like a law firm)?  How often will they come on-site?
  7. Client Turnover:  This can be a red flag if a firm has experienced significant client turnover.  It is always a good idea to ask to speak to a former client as well as a longstanding client.
  8. Ownership: Is the firm employee-owned or part of a large organization?  Is there up-the-ladder accountability?  Does the firm have other businesses (fund administration, accounting, brokerage) that could divert attention?
  9. Tenure: Firms that have been in business more than 5 or 10 years have a demonstrated track record that shows success and continuity.  New consultants may be figuring out their business model, filling time between jobs, or auditioning for a job at your firm.
  10. Insurance Coverage:  Shockingly, many compliance consultants do not carry E&O or professional liability coverage.  We recommend a minimum of $1 Million in coverage.

The Friday List: 2016 Regulatory Trends

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Today, we offer our “Friday List,” an occasional feature summarizing a topic significant to investment management professionals interested in regulatory issues.  Our Friday Lists are an expanded “Our Take” on a particular subject, offering our unique (and sometimes controversial) perspective on an industry topic.

A few weeks back, we offered our predictions for 2017 (see https://cipperman.com/2016/12/02/friday-list-2017-predictions/) .  Today, we look back on the most significant investment management regulatory trends for 2016.  Of course, past performance is no guarantee of future results.  However, as any handicapper will tell you, past behavior often foretells future actions.


10 Most Significant Regulatory Trends for 2016


  1. Enforcement Actions – SEC Chair White continued her “broken windows” enforcement against even the smallest infractions.  The SEC reported a record number of enforcement actions, including 160 cases against investment advisers and investment companies.
  2. Personal Liability – According to the SEC’s outgoing Enforcement Chief, the Enforcement Division names an individual in over 80% of cases.  This past year, we have seen cases against senior executives, mid-level executives, Chief Compliance Officers, and everybody in between.
  3. Fiduciary Duty – The Department of Labor adopted the long-debated fiduciary rule, which will upend the advice industry.  Additionally, the SEC considered a fiduciary rule for retail brokers, while FINRA supported a fiduciary standard.
  4. Cybersecurity – Hackers forced senior executives to learn new terms such as “firewall,” “vulnerability assessment,” and “intrusion.”   Many firms faced liability for failing to monitor service providers.
  5. Private Equity – The SEC instituted several 7-8 figure cases against the biggest names in private equity, an industry un-regulated until Dodd-Frank.
  6. Whistleblowers –The SEC’s Whistleblower Office reported more than $100 Million in aggregate awards.   The SEC also brought several cases alleging retaliation and illegal confidentiality agreements.
  7. Retail Distribution – Both FINRA and the SEC attacked wrap sponsors for the wrong share class recommendations and trading away.  At least 15 firms were charged for failing to conduct sufficient due diligence on third party performance claims.  The Investment Management Division continues to analyze 12b-1 fees and other distribution-in-guise payments.
  8. Gatekeeper Liability – Service providers have suffered by association with miscreant clients.  This past year saw enforcement activity against administrators, lawyers, auditors, custodians, directors, and consultants.
  9. Robos – Massachusetts raised concerns about how robo platforms satisfy their fiduciary responsibilities.  Meanwhile, FINRA heightened supervision of robo providers.
  10. Compliance Outsourcing – The SEC has recognized compliance outsourcing as a growing trend.  That trend accelerated in 2016: nearly 20% of advisers outsource compliance and approximately 2/3 use an outside compliance consultant.  Chair White has announced that the SEC staff has completed a proposal requiring all advisers to undergo third party compliance reviews.