The Chief Compliance Officer has extraordinary (and in some cases, unwarranted) access to employee records in addition to other confidential information such as executive meetings and emails. Firms should pursue enhanced background due diligence on potential CCO candidates, create information barriers so that the CCO does not have access to non-regulatory information, and implement a supervisory structure that ensures CCO accountability. Alternatively, consider outsourcing to a third-party firm that has limited access to firm systems as well as direct legal liability for breaches of confidentiality.
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.
Over the last several years, an increasing number of investment
management firms have chosen to outsource the Chief Compliance Officer role and
associated compliance function. In our
experience, these firms make this decision for rational business reasons based
on an assessment that outsourcing the compliance function is better than hiring
a full-time employee. Usually, firms
consider outsourcing because of an external event such as a less-than-perfect
SEC exam or an institutional due diligence process that suggests unknown weaknesses. Some firms decide to outsource after yet
another internal CCO changes jobs. Other
times, firm management simply gets frustrated with the inherent limitations of
the one internal compliance person.
Regardless, we list below the top 10 reasons investment firms should outsource
the CCO role and compliance function rather than hire an in-house employee.
10 Reasons Outsourcing Compliance Beats Hiring an In-House
Experience: A team of professionals can draw on decades of aggregate compliance experience to address a firm’s regulatory challenges.
Knowledge: No one person can provide the depth of knowledge of several compliance professionals working collaboratively.
Independence: A third party firm offers investors and other stakeholders an independent assessment of a firm’s compliance strengths and weaknesses.
Industry best practices: A multi-person team working with multiple clients across the country has the industry vision to inform the compliance program.
Accountability: A compliance firm stands behind its work and advice with a service level agreement and professional liability insurance.
24/7/365 support: A person may take PTO, but a team of professionals is available at all times for any emergency including unplanned client due diligence and SEC exams.
Personal liability: Serving as CCO involves significant personal liability, which is better left to professionals that understand and accept the regulatory and career implications.
Frees up internal resources: Internal personnel can focus on core activities such as portfolio management and fund-raising.
Management: Senior managers can avoid the confusing and time-consuming process of hiring, retaining, and managing an internal CCO, only to start the process anew in the event the CCO leaves.
Cost savings: Because of program efficiencies, outsourcing generally costs less than hiring a full-time employee.
A recent survey of registered investment advisers sponsored by WealthManagement.com and LPL Financial reports a significant increase in the number of firms outsourcing compliance and other non-revenue generating functions. The percentage of firms outsourcing compliance has doubled over the last 3 years. Nearly 1 in 5 RIAs now outsource compliance, a function deemed to be “necessary, but behind-the-scene activit[y] with less direct linkage to the customer experience.” Other often-outsourced activities include HR, taxes, and bookkeeping, as advisors become more “focused on the activities that are most critical to their businesses” while “it is getting increasingly efficient to outsource those functions less important to growth and client satisfaction.”
OUR TAKE: Outsourcing compliance has become an accepted practice especially for advisers that don’t have the resources to hire and retain internal compliance talent. A third party firm brings on-demand knowledge, scale, depth, experience, and independence.