Insourcing vs. Outsourcing

“Our Take” LIVE

November 1, 2012

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”)

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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

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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

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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

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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

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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.”

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Insourcing vs. Outsourcing

• Regulatory Knowledge• Depth• Business Knowledge• Management• Control

• Leverage• Independence• Cost• Liability• Regulators

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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

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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

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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

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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

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What to do?

• Outsourcing: Best practices, depth, independence, accountability, sharing liability, management

• Insourcing: leverage, control compliance output

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