A new report from the Securities Industry Association indicates that annual compliance costs for financial services firms have nearly doubled in the past three years, but whether the findings amount to nothing more than industry grousing or are genuine evidence that recent rulemaking has indeed been excessive, depends entirely on perspective.
"The best way for firms to meet the needs of compliance costs is to comply with the law," said Barbara Roper, director of investor protection at the Consumer Federation of America in Washington.
"It's not evidence of excessive regulation," she said of the study, whose participants ran the gamut between broker/dealers, money managers and insurance providers. "It's evidence of a systemic failure" by the industry to perform its fiduciary duty.
The numbers, however, are startling. According to the SIA, the cost of compliance reached an estimated annual total of more than $25 billion in 2005, up from $13 billion in 2002. The increased cost of compliance between 2002 and 2005 represents about 5% of the industry's annual net revenue.
Perhaps more alarming is the fact that a substantial portion of the costs could have been avoided. The study cites, among other things, duplication of examinations by regulators, inconsistencies or a lack of harmonization in rules and regulations, and delays in obtaining clear guidance on rules.
Also costly is the frequency of visits from regulators. A development Roper characterized as a "natural result of the industry's inappropriate behavior," the industry laments an average of 231 inquiries per firm over the last 12 months, or about one per day, according to the study. The Securities and Exchange Commission and the NASD accounted for nearly three-quarters of those visits.
"We hope that going forward, this study influences how policymakers think about the rules they write," said Marc Lackritz, president of the SIA.
While Lackritz said that the SIA is not advocating regulatory rollback - rather, they're pleading for more efficient work between regulators - the cost of compliance is driving other organizations to consider suggesting that those very steps be taken.
The U.S. Chamber of Commerce recently launched an executive panel to examine whether the landmark Sarbanes-Oxley Act is putting the nation's capital markets in jeopardy against its foreign competitors (see MME, 11/14/05). The Chamber, which is also mired in a legal battle with the SEC over the cost of its new independent chairman rule (see MME, 11/21/05), said it's keenly aware of the SIA's findings on compliance costs.
"It doesn't surprise us," said David Chavern, the Chamber's corporate governance initiative director. "We have also been tracking whether the current regulatory environment has become so burdensome that it is risking the liquidity of our markets."
Chavern also reported that the Chamber's executive panel is examining longstanding state and Federal regulations, as well. Findings aren't expected until later this year.
He also said oral arguments in the independent chairman case have concluded and the two sides are awaiting an opinion from the U.S. Court of Appeals in Washington. That decision should arrive in the coming weeks.
Meanwhile, the SIA is appealing to regulators for, as Lackritz said, "one rulebook, one set of procedures, one set of examinations."
In addition to better coordination among regulators - for example, the State of New Jersey just settled its stake in the Canary Capital Partners market-timing case, more than two years after the SEC and New York Attorney General Eliot Spitzer reached settlements - SIA member firms are also calling for better procedures around compliance obligations like regulatory requests, sweeps, inquiries and examinations.
Not surprisingly, they'd also like a respite from new rulemaking after the sharp increase of recent years.
Equally high on the SIA's list of recommendations to regulators is an improvement in their evaluations of the impact that new rules might have on the industry. A central point to the U.S. Chamber's argument against the independent chairman rule, SIA member firms claim that regulators aren't conducting sufficient cost-benefit analysis prior to enacting new rules, including their impact on different segments of the industry and different size firms.
The process, study authors and SIA economists Stephen Carlson and Frank Fernandez wrote, "should include meaningful input on the cost effectiveness of the measure under consideration from the securities industry from the very beginning, e.g., when a problem is noted and a remedy contemplated."
The SIA report also shows that firms would like published reports of cost assessments from Federal regulators, a consideration that would "play an important role in ensuring transparency and regulatory accountability and encourage efficient regulation."
Breaking down the exact costs of compliance, the study indicates that staffing-related burdens account for 93.9% of total compliance costs. The study authors noted, however, that the staffing impact could be even higher, as they could not determine the exact proportion of time every employee at a firm devotes to compliance. The study only asked for detailed compensation data for employees that report directly to a compliance officer.
Also driving staffing costs higher are the salary premiums that compliance professional command in today's regulatory environment. Out-of-pocket expenses, or those costs associated with hiring outside legal, auditing and accounting services, are also skyrocketing. Capital spending on items like sophisticated software to meet regulatory demands is rising, too. In addition, companies are increasingly losing new business as their executives devote more time to compliance, and the heightened production of disclosure documents is perceived by investors as an additional cost to them.
Roper, however, said there's one element of compliance that could be improved absolutely free of charge.
"If you look at the infraction records, oftentimes it's the same firms that are getting caught, a sign that the executives are condoning bad behavior," she said. "The tone is set from the top, and it doesn't cost anything to change that."
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