There are times when it makes sense to hire an expert. Securities regulations are complicated and failure to comply can be costly, both in terms of fines and damage to reputation. In my experience, here are the top reasons RIAs engage a compliance consulting firm:
- The firm has appointed a new Chief Compliance Officer who has no compliance background. (Here’s some useful advice: 7 Ugly Truths About Compliance: a Primer for new Chief Compliance Officers.)
- The firm plans to register as an investment adviser and needs to set up a compliance program.
- The Chief Compliance Officer has other duties in the firm and doesn’t have time to perform routine compliance testing and monitoring.
- The RIA is merging with or acquiring another firm with a new set of investment products and investment advisory representatives in far-flung offices.
- The Chief Compliance Officer knows that he is behind on the firm’s compliance tasks, has an outdated manual, or lacks the experience, support, and resources internally to efficiently create and manage a high-quality compliance program.
- The CCO resigned, and no one at the firm can (or will) take the position.
- The firm got a copy of a recent SEC document request list, and they need someone with experience and expertise to help them answer the questions and guide them through the exam process.
- The firm is (a) starting a private investment fund or (b) has been hired to advise (or sub-advise) a mutual fund.
- The firm received a lengthy deficiency letter from the SEC that says the staff has concerns related to its CCO’s understanding of the rules and regulations applicable to investment advisers.
- The firm has attracted institutional investors who require an independent review of the compliance program before they will invest.
No matter what the reason, hiring a compliance consultant is a cost-effective way to access resources and expertise you need to manage your firm’s compliance activities, such as developing and managing a compliance calendar, drafting the compliance program annual review (as required under Rule 206(4)-7 of the Advisers Act), and setting up a risk assessment. Firms also use compliance consultants to perform more mundane tasks, such as email review or regulatory filings, to free up compliance staff to work on more strategic initiatives. And if you need help convincing management that getting help is the right thing to do, check this out: SEC Exam Impact: Helping Firm Management to Understand the “Value Add” of a Well-Run Compliance Program.
What to Look for in a Securities Compliance Consulting Firm
Once you have identified the need, the next step is to find the right compliance consulting firm. These are some important considerations to help you narrow your choices.
- Experience and expertise. One of the most important considerations is whether the consultant has the relevant expertise to help your firm. Find out whether the consultant has first-hand experience in the area you need assistance. When discussing your needs with prospective firms, ask which consultant or consultants will be providing the service and review their resumes. Make sure the right people will be assigned to help you.
- Compatibility. The consulting firm should tailor its advice to meet your needs. For example, if your firm is subject to regulatory scrutiny, you may want conservative advice to re-build your credibility with the SEC. Maybe your firm is more aggressive and wants to understand the risks associated with different options before making a decision. A consultant should provide you with choices so that you can decide the level of risk you are willing to take.
- Customization. Customization means providing the right level of service at the right price. For example, if your firm does not have compliance expertise in-house, you may want a more comprehensive service that includes revising your compliance program to meet current regulatory requirements, providing consulting as needed, and performing routine compliance testing and monitoring. If the original proposal is beyond your means, ask the consulting firm to work with you on pricing. This may mean that you keep some tasks in-house to bring the price down. Alternatively, your needs may be minimal, such as a fresh look at your Form ADV to ensure it’s consistent with your firm’s operations and business practices and addresses the SEC’s latest hot buttons. The consultant should offer an hourly price option and agree to stay within budget. Look for a consulting firm that provides a range of services and pricing options and is willing to negotiate a solution that’s right for your firm.
- Communication. Some firms want to talk to compliance consultants frequently to find out what other firms are doing, what the regulators are saying, or whether the marketing team’s latest brainstorm is going to raise concerns. Other firms may not need advice, just help getting their work done. Find out how much (or how little) access you will have to your consultant.
- Resources. Find out what tools and resources the consulting firm offers. For example, find out whether the consultant has a platform that you can access to see what work is being done. Ask whether the consultant can provide you with reports on testing and monitoring quickly and easily in the event of an SEC exam. Ask for a sample of the reports. Ask about the staff being assigned to your firm. If one consultant is going to work with you, find out who you can call when that consultant is out of the office.
- Due diligence. Determine whether the consulting firm has adequate cybersecurity controls to keep your information safe and secure.
Tips from an Insider
Before you sign on the dotted line, consider these tips:
- Buyer Beware. All consulting firms and all consultants have different strengths and weaknesses. You should know which consultants are going to provide the service and their background and expertise. The firm may have some knowledgeable consultants, but if inexperienced associates are performing the work for your firm, you may be disappointed with the results. Consider asking for references and getting a few proposals before engaging a consulting firm.
- It’s a Two-Way Street. Consultants need information and guidance about your firm and what you expect. They cannot work in a vacuum. They will ask questions, request data, and look for input. Appoint a point of contact within the firm to work with the consultant. As the client, you should be open to feedback and prepared to make changes to your process. A successful engagement should result in solutions tailored specifically to your firm. The only way to achieve this result is to communicate and collaborate with the consulting team.
- Read the Fine Print. Understanding the services being provided for the quoted price, as well as what is NOT included. For example, the consultant may offer a limited number of consulting hours a month or may charge an additional hourly fee for services outside the scope of the engagement. If you know the scope of the services upfront, you can avoid disappointment and misunderstandings later on.
- You Get What You Pay For. Many consulting firms charge for their services based on the number of hours it takes to do the work. In determining the hourly rate, firms factor in overhead, and the consultants’ salaries. Firms that offer outsourced Chief Compliance Officer services may also charge a premium for the risk they take. When you engage a consulting firm, consider how much time it will take to perform the services you need and the level of expertise you want. Consulting firms with relevant experience should be able to deliver services efficiently and in-line with the regulators’ expectations. Keep in mind, however, that some tasks should take a significant amount of time, like revising a compliance manual or preparing an annual review of the compliance program. If a consultant agrees to perform this task cheaply, you may end up with a work product that reflects little time and effort.
- Breaking Up is Hard to Do. At some point in your firm’s relationship with a compliance consulting firm, it may become time to say goodbye. This can be for any number of reasons, such as your firm has decided to take the function in-house, or the consulting firm can no longer meet the needs of your growing firm. Understand the mechanics of termination and how to obtain copies of the records maintained by the consulting firm. Consider whether the consultant can send you all the documentation of testing and monitoring in a format that you can access and use without being charged additional fees.
The right compliance consulting firm can make a huge difference for a firm by providing proactive guidance and access to expert advice when needed. Make sure you do your homework to select the right one for your firm.
Partner with Hardin Compliance Consulting
Need help with your compliance program? Call us today at 1.724.935.6770, or shoot us an email at firstname.lastname@example.org so we can set up a time for one of our consultants to discuss your needs and how we can help. Hardin Compliance is always in your corner.
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