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Where compliance meets business….

Nicknames abound – the sales prevention group, the necessary evil, the wet blanket division…just a few of the more common references.  Does this cultural blind spot filter right up to the executive team?  Allow me to share with you a quick story.

A financial services firm had wanted to expand its product offering but was troubled with what would be best received by their clients.  The executive team, working with the head of marketing decided to survey their top clients with a simple questionnaire.  Marketing decided that the survey would be more likely to be returned if the client’s financial advisor sent out the survey – innocent enough. The selected financial advisors (all top producers) chose their top clients and sent out the survey.

After a month of chasing down the survey the data was compiled and the results were fruitful –  option strategies were a major opportunity.  Now the work began; the executive team with the assistance of operations drafted a procedure for processing options, the marketing department drafted a marketing piece and a promotion plan. This was a big move for the firm and management pulled the entire company together to present the launch.  The top advisors knew of this and began speaking with the surveyed clients prior to the launch of this new and exciting product line.  At the company meeting the marketing department began with the evolution of the firm discussing the company’s milestones and concluded with the exciting new offering

The Chief Compliance Officer (“CCO”) of the firm was excited about the presentation but he found himself in an awkward position – the firm was not approved to conduct options trading nor did the firm have a FINRA-registered Series 4 Registered options principal. In addition, he knows that a Continuing Membership Application (“CMA”or “1017”) could take up to six months and the firm could not conduct this business until it got FINRA’s approval.  Had he only been included in the process from the start this could have been avoided. But, the issue goes much deeper.  Think about the process that the firm went through to get here; executives met to discuss the new products to bring to the market, marketing decided to conduct a survey, advisors sent the survey to clients, marketing developed marketing materials – all without the involvement or knowledge of compliance. Leadership had not considered correspondence review, marketing review and approval, new product due diligence, supervision procedures, qualifying FINRA licenses (S-4), amongst other compliance-related concerns.

Compliance is no less critical to the functioning enterprise than finance, operations, marketing, sales, and human resources.  So why, historically has compliance taken the proverbial ‘back seat’? Rules, regulations, and supervisory oversight have spoiled the positive energy. Compliance can be perceived in a negative light in two ways.  First, it is viewed as anti-sales and second, a cost center.  To accomplish the changes outlined above, details are required and in some cases (e.g. when a FINRA CMA is needed) time is required.  By the time the CMA is approved and the product is ready for prime time, the CEO and management team have moved on and the excitement for the new service is history.

Why do we need compliance anyway and where did it start? Compliance is a function of government and was instituted to provide some structure and guidance, similar to the oversight of the banking and the health industries, with an underlying purpose of protecting the public.  Over the past decades rules and regulations have become so complex that it’s almost impossible to understand let alone apply them to the business risks because those risks are unique to each firm.  The SEC, FINRA and State Securities Divisions are overwhelmed with policing and interpreting the rules and regulations that they have developed to meet the laws created by the state or federal legislature.  Why are the rule books so extensive then?  If the regulators can’t barely keep up and apply them to the industry, how do they expect the firms to adopt them?

For the purposes of this discussion, compliance is a vital function of our industry for many reasons, including keeping the regulators at bay and protecting clients, the firm and registered representatives/financial advisers.  I will argue in that order. If your firm has 100 clients and you lose one, this is probably not a significant event. Of course no one wants to lose a client but this will not be a significant disruption to your business.  If your investment operations group does not provide stellar service to a client and forgets to complete a wire transfer, that could be an issue that could potentially cause harm to the client, the firm and the registered representative/financial adviser.  Not adhering to a regulatory rule, such as the story above about Options, and beginning to sell those products could cause significant issues for the firm and all involved. Selling an unauthorized product, failure to follow written supervisory procedures, failure to supervise – the list is not short.  This event could cause reputational risk to the firm and all those involved if the firm needs to rescind orders or notify clients that no new business can occur while they seek approval.  Establishing an active compliance program can be beneficial and protect the clients, firm and individuals from regulatory situations and embarrassment.

Compliance must be an integral part of the overall business. Your firm needs to build a compliance program that addresses the responsibilities of the financial advisor, branch manager, OSJ manager, compliance team, operations team, CCO, FinOp and ultimately the CEO.  Compliance risk can be managed – rules to meet regulatory requirements can be adopted by the firm to protect against regulatory risks. The philosophical transition and the real-world training of the team to understand this  goal can be time consuming and test patience.  A well-developed plan is a must.

Good business is having a proactive compliance culture from the top down.  It will ease the burden of regulatory exams, on-boarding a new registered representative/financial adviser, adding new products, adopting and implementing new policies and procedures, and ultimately will help with the successful growth of the business.

The professionals at RegMaven have held the positions of CCO, COO, CFO, and CEO for broker-dealers and investment advisers for many years. We have implemented compliance programs that have yielded success.  If you are looking to strengthen and scale your compliance functions, call upon our team of experts.  We stand ready to assist your firm.

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