Compliance Outsourcing Heating Up

Terry Flanagan

Alternatives sought to creating chief compliance officer position.

Investment firms are ramping up outsourcing of the compliance function ahead of the SEC registration deadline in March 2012.

Following the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, many investment advisory firms must register with the Securities and Exchange Commission for the first time. A registered investment adviser (RIA) needs to have robust compliance procedures, controls and monitoring in place.

According to Kinetic Partners, a global professional services firm to the asset management, investment banking and brokerage community, many firms, both large and small, are opting to hire professional consulting firms to manage and run the compliance function, rather than recruiting someone internally in the compliance role. Thus, these RIAs are effectively outsourcing the day-to-day compliance function.

“By outsourcing compliance management, it is more cost effective because firms do not have to hire an internal chief compliance officer,” Jonathan Saxton, director of Kinetic Partners’ global risk and regulation practice, told Markets Media.  “It also creates higher productivity and provides great industry knowledge and expertise.”

There are a number of significant advantages to this approach including; experience and expert knowledge of the rules and industry best practice, cost efficiency, and access to a large pool of industry experts.  A consulting firm can manage the RIA’s compliance responsibilities, giving peace of mind to the internal person responsible for compliance that the firm’s policies, procedures, testing, record-keeping and reporting comply with SEC requirements and industry best practices.

Dodd-Frank requires firms to exercise due diligence over the operations of firms to which they’ve outsourced compliance management.

“They don’t necessarily need to oversee all operations, but they do need to be able to defend and justify their decision to hire an outside firm that they have outsourced compliance management to,” said Saxton.

The final rules of Form PF announced by the SEC have opened up a whole new era for hedge fund and private equity businesses, which will now be forced to disclose more information to the U.S. government than previously required.

As such, each entity should plan how they will address the form’s requirements carefully, according to Kinetic Partners,

It is essential that advisers plan ahead and perform a proper impact assessment, evaluate the necessary modifications to their existing systems, and communicate the impact of the filing of Form PF to all necessary parties, the company said.

While the rules of Form PF require managers to now disclose more information to the Securities and Exchange Commission as outlined in the Dodd-Frank Reform Act, the final rules will also make it easier for them to report earnings than outlined in the original rules.

One of the significant differences that the SEC has made in comparison to the Form’s original version is the Assets under Management (AUM) at which private fund advisors must report, which was raised from $1 billion to $1.5 billion.

Advisors will also now have a 60-day reporting deadline as opposed to the 15-day deadline that was initially proposed.  In addition, Form PF will also take effect later than originally intended with advisors with over $5 billion AUM, the first to be affected, having to report in the middle of 2012.

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