Survey: Financial Services Firms Are Overdue for SEC Exams

‘We believe the SEC will move forward to require every investment adviser to engage a third party compliance review to supplement SEC examination efforts,’ says Todd Cipperman.

It appears that many financial services firms are “overdue” for exams carried out by the U.S. Securities and Exchange Commission (SEC), according a recent survey.

The Cipperman Compliance Services survey revealed that 42 percent of those questioned have not had a routine SEC exam in over three years. That is up from the 37 percent of firms announced in the 2015 C-Suite Survey. This despite the fact the SEC has added staff to do the exams, Cipperman said.

It is also notable that 84 percent of the firms questioned undertook a compliance review in the past year. That is an increase from the 67 percent of firms which undertook compliance reviews in the previous year.

In addition, the survey shows that 92 percent of those questioned did not change compliance programs—despite the increasing presence of whistleblowers—which appears to be an SEC priority.

The survey also showed that 77 percent of those questioned did not change programs despite issues related to personal liability standards.

Todd Cipperman, founding principal of Cipperman Compliance Services, told InsideCounsel that it is not surprising that 42 percent of those questioned did not have an SEC exam in over three years. “It’s not all that surprising,” he said. “The SEC has added more than 100 new examiners, but there are over 12,000 registered investment advisers. We believe the SEC will move forward to require every investment adviser to engage a third party compliance review to supplement SEC examination efforts.”

He additionally points out that “Senior executives all ‘talk the talk’ about compliance. But, many do not ‘walk the walk.’ Various studies (and our own empirical evidence) suggests that financial services firms should spend at least 5% of revenues or 7% of operating costs on compliance. Many firms either don’t know how much they spend or spend far too little.”

General counsel should especially note that “Senior executives are beginning to view compliance as a franchise-building reputational enhancer (56%), rather than merely a cost of doing business or a necessary evil,” according to Cipperman.

“In-house lawyers and GCs should capitalize on this perspective, and use the compliance function to help enhance the entire risk management infrastructure,” Cipperman said. “This may help the never-ending budget process.”

He also says that the SEC “is trying to leverage its resources by using whistleblowers to do surveillance. Now, law firms have emerged to represent whistleblowers on a contingency basis. These whistleblower law firms may have the same effect that plaintiffs class action law firms had in the 1980s and 1990s. As whistleblowing becomes more prevalent, firms will have to react by implementing appropriate procedures.”

With these survey results, Cipperman recommends that general counsel and compliance officers should, “Hire dedicated and experienced compliance personnel to implement a best-in-class program. The Advisers Act’s rules are not intuitive or easily learned. Smart lawyers hire people with the right expertise. Compliance is no different.”

It was reported, too, that 56 percent of firms have a standalone chief compliance officer. An additional 35 percent give these duties to another person, such as the general counsel or chief operating officer, according to the survey.

The survey included questions to 165 professionals.

Further reading:

SEC compliance program shares key regulatory issues to be aware of for the year ahead

Chief legal officers most concerned about ethics and compliance, regulatory changes

Contributing Author

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Ed Silverstein

Ed Silverstein is a veteran writer and editor for magazines, websites and newspapers. A graduate of Harvard's Kennedy School of Government, he has won several...

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