Insourcing vs. Outsourcing
“Our Take” LIVE
November 1, 2012
Compliance Rule (206(4)-7)
• Adopt written policies and procedures
reasonably designed to prevent
violations of the securities laws;
• Annually review the policies and
procedures; and
• Designate a Chief Compliance Officer
(a “CCO”)
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Regulatory Requirements
• Registration/Disclosure
• Fiduciary responsibility and
suitability
• Solicitors
• Advertising
• Privacy
• Client Agreement
• Proxy Voting
• Anti-Money Laundering
• Proxy Voting
• Fees
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Custody
Trading
Insider Trading
Supervision and licensing
Code of Ethics
Inspections and
Enforcement
• Section 13 filings
• Recordkeeping
• Compliance
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What is Compliance?
• Appoint a CCO
• Implement/Maintain
compliance manual
• Ongoing testing of policies
and procedures
• Annual review and report of
findings
• Risk Assessment
• Monitor operations
• Training
• Compliance
committee/management
review
• Compliance calendar
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Compliance calendar
Certifications and notices
Licensing
Investigate misconduct
Manage regulatory inquiries
and exams
Code of Ethics and
preclearance
ADV updates
Review marketing materials
SEC filings
Respond to Clients/Boards
Due diligence service
providers
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Risks of Noncompliance
• Public sanction
– reputation and client risk
– competitiveness
• Civil sanctions: bans from industry
• Civil monetary penalties
– Rescission
– disgorgement
• Criminal prosecution
• Increased examination and regulatory focus
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Compliance Programs:
Enforcement Lessons
• Actions against firms for weak compliance programs (In re Asset
Advisors et. al.; In re Wunderlich; In re JSK Associates; In re
Alpine Woods)
• Template or incomplete compliance manuals (BD WSPs)
• Inadequate testing and annual reviews
• No training
• Inexperienced or absent CCO
• No implementing procedures
• Failure to properly resource
• Ignoring Code of Ethics
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Delaying
• Canned compliance manual
• Adopt P/P but no implementation
• Add CCO responsibilities to CFO, COO,
Administrator
• Hiring under-qualified
• Allocate minimal time/resources
• “We do the right thing.”
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Insourcing vs. Outsourcing
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Regulatory Knowledge
Depth
Business Knowledge
Management
Control
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Leverage
Independence
Cost
Liability
Regulators
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Knowledge & Depth
• Power of numbers
– Compare and benefit from combined
experience
– Sharing information
– Industry best practices
– Institutional knowledge lives after turnover
• Unique person
– Firm-specific knowledge
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Management, Control, Independence
• Hiring a firm ensures accountability and
independence
– 24/7/365 availability
– Accountability
– Easier to change firms than fire a person
• In-house CCO reports directly to management
– Control vs. loss of independent perspective
– Career pathing
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Cost and Leverage
• Buying a service vs. a person
– Tailor costs to firm size and needs
• Ability to leverage in-house CCO for
other functions
– Paying compliance dollars for noncompliance functions
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Liability and Regulators
• Agreement offers direct recourse
• In-house CCO can only be fired
• Regulators want best practices compliance
programs
• Firm needs to adequately resource and
empower
• In-house CCO does not shield firms from
enforcement actions
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What to do?
• Outsourcing: Best practices, depth,
independence, accountability,
sharing liability, management
• Insourcing: leverage, control
compliance output
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