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Comparative Analysis: Insourcing vs. Outsourcing Compliance Services

Delve into the advantages and risks of Insourcing vs. Outsourcing Compliance Services, including regulatory requirements, risks of noncompliance, enforcement lessons, and management considerations. Discover how firms can choose between the two options based on aspects like cost, control, liability, and regulators' expectations.

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Comparative Analysis: Insourcing vs. Outsourcing Compliance Services

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  1. Insourcing vs. Outsourcing “Our Take” LIVE November 1, 2012

  2. Compliance Rule (206(4)-7) • Adopt written policies and procedures reasonably designed to prevent violations of the securities laws; • Annually review the policies and procedures; and • Designate a Chief Compliance Officer (a “CCO”)

  3. Regulatory Requirements • Registration/Disclosure • Fiduciary responsibility and suitability • Solicitors • Advertising • Privacy • Client Agreement • Proxy Voting • Anti-Money Laundering • Proxy Voting • Fees • Custody • Trading • Insider Trading • Supervision and licensing • Code of Ethics • Inspections and Enforcement • Section 13 filings • Recordkeeping • Compliance

  4. What is Compliance? • Appoint a CCO • Implement/Maintain compliance manual • Ongoing testing of policies and procedures • Annual review and report of findings • Risk Assessment • Monitor operations • Training • Compliance committee/management review • Compliance calendar • Compliance calendar • Certifications and notices • Licensing • Investigate misconduct • Manage regulatory inquiries and exams • Code of Ethics and preclearance • ADV updates • Review marketing materials • SEC filings • Respond to Clients/Boards • Due diligence service providers

  5. Risks of Noncompliance • Public sanction • reputation and client risk • competitiveness • Civil sanctions: bans from industry • Civil monetary penalties • Rescission • disgorgement • Criminal prosecution • Increased examination and regulatory focus

  6. Compliance Programs:Enforcement Lessons • Actions against firms for weak compliance programs (In re Asset Advisors et. al.; In re Wunderlich; In re JSK Associates; In re Alpine Woods) • Template or incomplete compliance manuals (BD WSPs) • Inadequate testing and annual reviews • No training • Inexperienced or absent CCO • No implementing procedures • Failure to properly resource • Ignoring Code of Ethics

  7. Delaying • Canned compliance manual • Adopt P/P but no implementation • Add CCO responsibilities to CFO, COO, Administrator • Hiring under-qualified • Allocate minimal time/resources • “We do the right thing.”

  8. Insourcing vs. Outsourcing • Regulatory Knowledge • Depth • Business Knowledge • Management • Control • Leverage • Independence • Cost • Liability • Regulators

  9. Knowledge & Depth • Power of numbers • Compare and benefit from combined experience • Sharing information • Industry best practices • Institutional knowledge lives after turnover • Unique person • Firm-specific knowledge

  10. Management, Control, Independence • Hiring a firm ensures accountability and independence • 24/7/365 availability • Accountability • Easier to change firms than fire a person • In-house CCO reports directly to management • Control vs. loss of independent perspective • Career pathing

  11. Cost and Leverage • Buying a service vs. a person • Tailor costs to firm size and needs • Ability to leverage in-house CCO for other functions • Paying compliance dollars for non-compliance functions

  12. Liability and Regulators • Agreement offers direct recourse • In-house CCO can only be fired • Regulators want best practices compliance programs • Firm needs to adequately resource and empower • In-house CCO does not shield firms from enforcement actions

  13. What to do? • Outsourcing: Best practices, depth, independence, accountability, sharing liability, management • Insourcing: leverage, control compliance output

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