There's a new sheriff in town at the country's investment advisors and broker/dealers.The Securities and Exchange Commission's new rules on the Investment Company Act of 1940 and the Investment Advisers Act of 1940 require firms to have a chief compliance officer who is held accountable for the firm's compliance with all regulations.

The rules became effective in October of 2004. The NASD passed similar laws, and financial services firms of all types scrambled to upgrade manuals and find personnel to administer the increased workload.

Mont Levy, chief operating officer and general counsel at St. Louis-based Buckingham Asset Managers, outlined a roster of surprises and lessons that he learned during the first year of heightened compliance regulations.

Top on Levy's list was the hiring of a full-time compliance officer to assist him - a job that was filled without even having to place a want ad. A law student who had been interning with the firm had graduated and Buckingham offered him a full-time post.

The first year has kept Levy and his new charge busy. The new department of Levy as chief compliance officer and one full-time employee handles the compliance affairs of the $1 billion-plus registered investment advisor and insurance services firm, as well as serving as a resource for the several dozen CPA firms that use BAM Advisor Services as a turnkey asset management program.

Levy spends about a quarter of his time as CCO, supervising the compliance function, and also serves as chief operating officer of BAM Advisor Services and general counsel for the firm. "Two years ago was the year of preparation, and last year was the year of doing," said Levy. "I have to admit, though, that we felt more overwhelmed in the year of preparation."

The bulk of the work went into internal control implementation and documentation. The control procedures affect the 75 employees at BAM, including about 15 investment advisor associates. BAM Advisory Services clients are independent contractors with sole compliance responsibility. But Levy's department provides resources to help them.

Buckingham contracts with National Regulatory Services to make guides and templates, as well as offering help with technical issues on specific points.

"We spend a lot of time talking with BAM clients," Levy said. "We provide a strong and constant resource for their compliance issues."

Buckingham also upgraded its technology to address the new requirements. For one, they added a searchable format to their already sophisticated e-mail storage program. They save every e-mail, and do periodic random and keyword checks. "We tried to keep it simple on the question of what to save," said Levy. "We came to the conclusion that the cheapest technology out there today is memory, so we just save it all."

Use what you have

Identifying technology needs to ensure compliance is an ongoing process for many firms.

Mary E. Keefe, J.D., managing director and director of compliance for Chicago-based Nuveen Investments, upgraded the technology function with new systems and processes to serve the advisors, broker/dealers, and also the mutual fund families owned by the company. But she points out that the firm also focused heavily on using technology they already had in place. "Before, we might have used one corner of a particular compliance system," said Keefe. "Now we're trying to maximize the potential of all the systems."

The disaster recovery requirements still demand the attention of Levy, as well as that of the firm's controller and tech professionals. Client back-up materials get stored off site in a bomb-and-earthquake-proof bunker. The firm is about to have the first live training where employees will work from remote sites while accessing their needed files.

"We're fulfilling the SEC requirements, but this is also good business," says Levy. "[Things like] fires happen, and we do have the fiduciary duty to clients to keep business going in the event of a disaster."

More lessons may yet come up during the preparation of the annual report due in early 2006. Both Buckingham and BAM Advisors are working with NRS for assistance in language and templates to help reduce the time spent. "Another chunk of time for the compliance officer will be preparing this annual report," says Levy. "This should be fairly straightforward for all firms that have an active compliance program."

The compliance program also needs to be dynamic to accommodate further changes. Levy is expecting more work soon, due to both increased anti-money laundering requirements and upgrading Part Two of the Uniform Application for Investment Advisor Registration, or ADV, to online filing. In anticipation, he prepared for the money laundering rules as part of the first year's work.

Several situations arose where he was glad he had the information. "Fixed-income wholesalers in particular ask for this documentation," says Levy. "And as big as we are and as fast as we're growing, I'm glad we don't have to go back and collect all that information on clients today."

Going into the second year of the new regimen, Buckingham is looking to expand the awareness of the benefits of added compliance. "This is not productive work in that it doesn't add to the bottom line," says Levy. "But it's good for business to be able to tell clients the extent we go to to protect them."

While creating and documenting internal controls was a big part of the first year's work, Levy learned that they would be busy with the task for a long time. "This is day in, day out, forever kind of work," he says.

One reason, said Nuveen's Keefe, who served as regional director of the SEC's Midwest regional office until November 2003, is that the focus of the SEC has changed. "The commission is trending toward making compliance the responsibility of management, unlike the old days, when the commission bore that responsibility," says Keefe. "But the commission can't keep doing things the old way and keep up with this fast-growing industry."

With the completion of the first annual report, the list of firsts will wind down into practiced habits. "We won't need to expand unless the SEC throws another big thing at us," says Levy. "But we know we will never be without a full-time compliance officer again."

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access