More firms plan to add compliance staff in the coming year, thanks to the more aggressive regulatory agenda coming from the Securities and Exchange Commission, including the new rules around advisor marketing and testimonials, according to a recent survey of industry compliance leaders.
In all, 42% of survey respondents, including RIAs and independent broker/dealers, expect to increase compliance staff in the next year, “a marked increase” compared with the year before, when only 30% said they would dedicate more resources to the business function, according to the 2022 Finserv Compliance Benchmark Report from Hearsay Systems, which supplies compliance platforms and services for firms.
“That’s a major shift in the compliance world, because typically resources in the financial services industry aren’t necessarily being directed at compliance,” Simpson said.
In the previous year, firms’ compliance departments were largely tasked with meeting the regulatory demands with the same, or sometimes fewer, resources and staff, according to Hearsay Compliance Principal Bill Simpson.
Hearsay questioned 50 compliance leaders at firms between August and October of this year, with 26% of respondents reporting they were likely to boost internal compliance staff. Eight percent reported they’d boost their external staff, with another 8% responding they’d do both.
The report’s release comes several weeks after the compliance date for the SEC’s marketing rule, which details when and how advisors can use testimonials and endorsements in advertising, as well as what performance metrics are allowed in marketing materials.
Compliance professionals were also concerned about staff using text messages at their firms in the wake of the recent blockbuster $1.2 billion fine against JP Morgan Securities and 16 other firms. Most respondents believed texting was one of the riskiest channels as both a reputational and regulatory risk (they viewed TikTok and Twitter as other potential reputational risks, while WhatsApp and Facebook were the additional risks from a regulatory standpoint).
Surprisingly, some compliance professionals said there was no interest in supervising some of these channels, with 84% uninterested in WhatsApp, 81% uninterested in WeChat, and a whopping 96% not expressing an interest in supervising TikTok communications. Most likely, firms will rely on staff to avoid using the channels for professional purposes.
To Simpson, firms viewed boosting compliance resources as a “clear trade-off” to avoid the risk of a fine that can reach hundreds of millions of dollars, not including additional remediations, the costs of updating compliance after an enforcement action—and having to hire a compliance consultant.
“Firms would rather just make the initial investment, and not have to worry about not only the financial risk, but also the headline risk of being in the news as one of the firms caught up in this large sweep that’s still happening,” he said.
Simpson said firms were grappling with the “knock-on effects” stemming from the aggressive wave of new regulations and proposed rules coming out of the SEC, including how to allocate compliance resources. Writing policies and procedures—a crucial requirement for most SEC rules—was viewed as one of the top three weaknesses compliance firms faced in the most recent survey. It hadn’t made the top three list of weaknesses in the prior year.
That's because firms are struggling to keep pace with policy updates, Simpson said. Compliance departments are covering a lot of ground, making sure they aren’t in violation of the new ad rule or the SEC’s new focus on electronic communications.
“Because compliance teams are underresourced, they can’t manage these massive regulatory shifts in a way that makes it efficient for them,” he said. “The end result is they’re scrambling essentially to manage the massive wave of regulatory changes happening at the moment, which is creating a situation in which they need to do a risk-based analysis of where can they afford to free up resources in the interim in a temporary way so they can address the major risk issues at the time."
