Critical Elements of Compliance Program Design

Advisers struggle to wrap their minds around compliance program management, and there are many potential causes for this. Many advisers aren’t interested in allotting the time necessary to learn about compliance. Others have a genuine desire to operate their firm’s compliance programs but can’t quite seem to find a rhythm of efficiency and confidence in their daily operations. There are even seasoned compliance professionals who struggle with implementing policies and procedures when taking over existing compliance programs. Despite the many contributing factors to compliance inefficiencies, there is one foundational element that impacts the future of every firm’s Compliance program design.

Compliance program design refers to the process that a Registered Investment Adviser leverages to develop its compliance systems, processes, and procedures. In other words, we are discussing the process of evaluating the elements of a firm’s operations that will dictate the formation and ongoing supervision of the firm’s compliance program. Multiple steps are necessary for adequate program design, and more often than not, they don’t get done in a way that lays a solid foundation for the future of a firm’s compliance program. This piece will discuss the required steps for compliance program design and a few common reasons that this critical process often gets omitted. We’ll discuss this process in the context of six crucial steps.

1. Firm details and demographic information

It’s impossible to assess risks associated with a firm’s compliance program without a demographic overview. Items such as the firm’s principal place of business, jurisdictions of registration, assets under management, number of employees, and registered investment advisers.

2. Evaluate the firm’s services, products, and fees

A thorough understanding of the firm’s services and fees is critical to compliance program design. Financial planning-focused firms may have specific needs surrounding documenting evidence of services rendered and providing detailed fee calculations on invoices. Firms that highlight more traditional investment management services will require an evaluation of the process of communicating billing instructions to the custodian. Advisers that execute complex trading strategies involving derivatives and leveraged securities may require heighten supervision from a client suitability standpoint. Private fund advisers require an entirely separate set of filings altogether, and insurance-focused advisers require more by way of annuity and insurance product suitability. This is perhaps the most critical evaluation a compliance professional must make to execute an adequate compliance program design.

3. Identify and define the type of client and niche

The type of client that a firm serves plays a significant role in how the firm should operate from a compliance standpoint. For example, financial planning-focused firms may have clients with smaller account balances. When this is the case, the compliance program should focus on documenting the value provided during financial planning engagements instead of evaluating fees in the context of assets under management. As a result, the firm might elect to allocate resources to billing and invoicing reviews. Alternatively, firms that target high net worth clients for investment management relationships may benefit from spending more time on performance reporting reviews and client portfolio management discussions in client meetings.

4. Create generalized goals for growth trajectory

Firms in growth mode will need to be mindful of how expansion will impact its compliance program. State-registered firms that are growing quickly need to plan for registration in additional states. Adding additional investment advisers and acquiring other practices also requires strategic planning and compliance resources. Remote supervision of investment advisers also creates the need for a systematic approach for supervision that needs to be organized before hiring additional advisers. Defining growth goals early in the process allows a proactive approach to facilitating firm expansion.

5. Identify areas of risk based on the points mentioned above of evaluation.

The firm can create a summary of the risks that are most likely to impact the firm’s compliance program. With this information, we design the foundation of the firm’s compliance program.

6. Review regulatory statutes and examination findings.

With knowledge of how the firm operates, the services offered, the types of clients targeted, the firm’s growth trajectory, and the risks that come with these factors, the firm can now review regulatory guidelines to finalize program design with specific risk mitigation strategies. No less than annually, the SEC publishes exam priorities and findings based on audits executed. In most state jurisdictions, regulators maintain a website for updates on exam priorities and regulatory guidance. By comparing these resources to the firm’s identified risks, the compliance program can be designed in a way that aligns the firm’s priorities with those of the regulatory jurisdiction in which the firm operates.

Why does this process get omitted?

1. New firms don’t have time

Starting and preparing to launch an RIA can be like drinking from a fire hose. Between the firm initial registration process, business entity set up, custodian onboarding, client account transitioning, tech stack management,…the list of tasks goes on and on. Quite simply, many new firm owners don’t have time to go through the process.

2. Established firms don’t allocate resources

Once a firm has launched and has found its footing in the industry, a new set of tasks emerges. Scaling the business, refining the niche, servicing clients, and preparation for growth can all become items of higher priority than compliance program management. Resources tend to get allocated more towards revenue-generating activities than towards the back-office functions of operations and compliance.

3. The longer you wait, the harder it is

This statement exemplifies the “foundational” approach to compliance program design. You don’t wait to build the foundation of a home three or four years after moving in. This same principle applies to compliance program design. The farther from launch the firm travels without compliance strategy, the more changes the firm undergoes, and the more challenging it becomes to go back in time to identify and mitigate areas of risk.

It’s never too late to take a look at the risks that may be impacting a firm’s compliance program. In fact, all firms should have a process in place to execute an Annual Risk Assessment. Still, compliance program design, just like many things in business management, is better executed sooner rather than later.

These materials have not been reviewed or approved by any regulatory agency, and represent solely the interpretative opinions of Synergy Compliance Education (“Synergy”). To the fullest extent permissible pursuant to applicable laws, Synergy disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose. In no event shall Synergy have any liability for damages, losses, and causes of action for accessing these materials.