- Management structure that
- Management that does not
have dedicated compliance personnel (in-house or third party) that is
charged with keeping the compliance program current
- Written procedures that are
not up to current standard
- Written procedures that are
not customized and/or do not address all business areas of the firm
- Disorganized compliance
- Gaps in required
- Failure to implement
procedures detailed in the compliance manual
- Absence of procedures or
documents for one or more compliance requirements
- No clear system of assigning
compliance responsibilities to staff members
Do any of these sound familiar to you?
These situations call for a structured approach
toward evaluating, planning the corrective phases and implementing a new system
of administration of a firm’s compliance programs. For firms in this position,
it is wise to be proactive in seeking help and addressing the issues prior to
regulatory audit. Often compliance programs in this situation contain serious
problems that may force regulators to escalate their response to ensure the firm’s
future compliance. Not only do these escalations cost significantly more than
just committing resources to fix the problems, they also damage the firm’s
reputation as the firm is required to disclose to clients and potential clients
its prior failures in the compliance program.
The first step in determining the degree and depth
of the problems is to get an expert assessment of the existing compliance
program. Our staff will generally use the internal inspection to
conduct the assessment (which also fulfills the annual requirement for annual
inspection in any case), although it can be done through other means as well.
Based on the assessment, our staff will sit down with senior management to
discuss the problems and make appropriate recommendations whether it is a case
of several minor fixes, to several visits by a compliance professional to patch
the holes, or if compliance program rehabilitation is required.
We take a methodical, structured approach towards
the rehabilitation of a compliance program. After the assessment phase, it is
clear what the problem areas are and the firm is placed in a process that
addresses structural problems as well as documentation problems. The
rehabilitation process goes through six phases to bring the firm to an
appropriate level of compliance. The six phases are:
1. Assessment – as mentioned previously, an
assessment is conducted to determine where and to what extent problems exist
while at the same time fulfilling the annual inspection requirement.
2. Structural – if written procedures are
the foundation of a good compliance program, corporate structure is the rebar
that makes effective compliance possible. Reporting lines are clarified and
incidences of self-supervision are eliminated (even in smaller firms).
3. Written Procedures – the compliance
manual is brought up-to-date with current regulation and is then customized for
the firm’s specific operations.
4. Filing System – the filing system is the
reflection of a compliance program. All compliance tasks ultimately result in
documentation. That documentation has to incorporate all key pieces of data,
has to be organized in an effective manner, must be placed in a filing system
that allows for prompt retrieval when necessary and has to be stored in an
approved method of storage.
5. Procedure Implementation – the written
procedures have to be implemented throughout the office. Our experience has
shown that more often than not there are underutilized human resources in most
firms that can be tapped to affect new compliance procedures and not have the
compliance function require staffing increases.
6. Systematize the Compliance Function – THE
MOST IMPORTANT PHASE IS CREATING A SYSTEM BY WHICH THE COMPLIANCE PROGRAM WILL
BE ADMINSITERED GOING FORWARD. Without such a system, the firm will end up
right back where it started in this process. Clear responsibilities are laid
out whether it’s in-house resources or with the assistance of third parties.
Very few small to mid-size firms can effectively administer a compliance program
using entirely in-house resources. Conversely, it is not generally desirable
(both in terms of having an effective compliance program and cost) to have a
third party to entirely administer the compliance program either. Thus, firms
generally find a spot between the two extremes that fits the experience level
of their in-house human resources and their budget for compliance expenditures.
This approach has been used numerous times to help
firms present a more professional image to clients, particularly institutional
clients, as it demonstrates a knowledge and commitment to keeping clients
safeguarded against unscrupulous investment firms. One of our clients once
called the purchase of this process “cheap insurance” against regulatory or
legal action. Indeed the cost of this program is generally smaller than all but
the smallest regulatory fines and is far less expensive than any legal judgment
against a firm. All it takes to get started is to commit to the assessment and
thereafter a course of action can be established.
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