Tech prep ahead of a compliance review

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When Securities and Exchange Commission Chair Mary Jo White testified before the U.S. Senate Committee on Banking last month, she reiterated her recommendation that the SEC propose a new rule requiring independent compliance reviews of registered investment advisers.

The goal isn’t to replace regulatory exams but to improve overall compliance among what she described as the “vast and growing” population of RIAs.

The current level of SEC exam coverage is estimated to represent a mere 10% of all RIAs.

White cautioned that this “cannot be allowed to persist" and “significantly more resources will be needed to fulfill our responsibility to investors.”

Some expect the SEC to take action on mandated RIA reviews this year. In the meantime, regulators are relying more than ever on quantitative techniques to triage their limited staffing resources.

Harkening to White's dilemma of maximizing resources to stem compliance risk, some compliance consultants are turning to technology to do more with less.

For instance, in March, Pittsburgh-based Hardin Compliance implemented a new software suite for consultants from BasisCode Compliance.

Last month, BasisCode Compliance was named a finalist in’s 2016 Industry Awards for its new platform developed specifically for consultants.

The software, introduced in October, features a dashboard that allows consultants to manage tasks across their client base more easily. It features a secure online portal, with centralized document and task management.

Automated reminders can be routed, time-stamped and shared with clients to serve as an audit trail of actions taken when and by whom.

“Through data centralization, workflow collaboration and process consistency, we can now share historical insight whenever a team member, client or regulator requests it, minimizing disruption, maximizing productivity,” says Hardin Compliance Managing Director Jacqueline Hummel.

Consultants such as Hardin Compliance help manage their client's compliance obligations, by developing firm-specific compliance programs or performing testing and monitoring of regulatory requirements. They also are called upon to shore up a firm’s defense in the event of a regulatory inquiry or deficiency.

Given the drive to require compliance reviews, regulators will scrutinize the tools of the trade.

Indeed, defendants in enforcement actions are often required to hire a consultant that is acceptable to the regulator.

The SEC may tear a page from the U.S. Department of Treasury Office of Controller rulebook in its banking guidelines on employing independent consultants to remedy violations.

When conducting reviews, the OCC evaluates the “expertise and resources the consultant commits to the engagement,” including its capacity, information security, risk management, reporting and document custody practices.”

RIAs would be well advised to assess the quality of tools that a consultant uses to run its business, and software can play a valuable role in this regard. Instead of internally developing or implementing an automated compliance management solution, many consultants use the same error-prone manual tools and practices that financial firms have outgrown.

On the other hand, some consultants such as Hardin and Chicago-based Titan Regulation are also making the move to technology-powered tools that are giving them a leg-up.

“As a start-up, we were able to work without technology. However, as we continue to scale and face the challenges of a larger business, technology is crucial,” says Julie Dixon, managing principal of Titan Regulation, which implemented the BasisCode Compliance platform last year.

“Now we have a seamlessly integrated set of compliance management tools developed by software experts so we can spend more time providing clients with our expertise,” she says. “We are more productive, and our staff can handle more workflow."

Financial firms and consultants can ill afford to adopt a set-it-and-forget-it approach to compliance management. And yet many advisers are found at fault for relying on boilerplate compliance manuals and failing to actively maintain a culture of compliance.

On the contrary, the implementation of tried and tested software serves as evidence that a consultant is working proactively to implement effective tools and resources on their clients' behalf.

Software can help consultants maintain fluid communication between staff and supervisors to minimize key person and turnover risk while maximizing operational efficiencies. It can help managers analyze large subsets of data to reveal patterns of behavior associated with specific staff and responsible parties.

Instead of emails buried in folders on a network or documents in a filing cabinet to dig through, everything is ready when regulators walk in the door.

Technology is an important differentiator that regulators will consider when evaluating the resources consultants use on the job. At the same time, expertise in software development typically falls outside a compliance consultant’s core competence.

This reality creates an ironic compliance challenge for consultants who face unintended risks in service delivery, including source code and data quality management as well as infrastructure support.

As consultants continue to take center stage, financial firms and regulators will be evaluating the quality of tools they use to help advisers run compliant businesses. Using a tech-enhanced approach assures senior management and regulators that the consultant is making an active investment to safeguard the firm and clients.

“Relying on software developed by specialists was a faster, easier and less risky way for us to handle multiple compliance programs while staying focused on what we do best,” Hummel says.

This story is part of a 30-30 series on ways to upgrade your practice.

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