Given the growing visibility and enforcement actions of regulatory agencies in the US financial services industry, the Institute for Innovation Development recently talked with Todd Cipperman, managing principal of Cipperman Compliance Services — an industry leader in providing outsourced regulatory compliance services for registered investment advisors, fund sponsors and broker-dealers. The firm offers its clients the opportunity to fully outsource the CCO role or take on a strategic support role and implementation responsibilities in partnership with the in-house CCO.

Because of his unique perspective and real world vantage point working in the trenches with financial advisors, industry leaders and regulatory agencies, we wanted his take on the regulatory actions and trends he sees that we should be most aware of. We also asked for his suggestions on how to best deal head-on with an environment of increasing regulatory oversight and change.

Bill Hortz: Please share with us what regulatory trends you are seeing that most concern you.

Todd Cipperman: There are a number of regulatory compliance trends that we expect to impact investment managers for the foreseeable future. One trend is the SEC’s ever-expanding regulatory and enforcement agenda. Many assumed with the new administration in Washington that regulation was going away but we're not seeing that at all — the number of examinations are way up.

Chairman Clayton has really doubled down on the examination program that Mary Joe White pushed. He has said, very publicly, he wants to double the number of advisor exams so that the SEC will examine up to 20 percent of advisers very year, up from the 10 percent under the Mary Joe White regime. He's asked for a lot more resources to do that.

Second, more examinations tend to lead to more enforcement actions, especially those targeting senior executives. Mary Joe White and prior enforcement directors have said they wanted to prosecute individuals because of the significant deterrent effect. Chairman Clayton has supported the prosecution of individuals because senior executives will walk the line when threatened with reputation and career-ending enforcement actions. The fact that an executive could be charged personally has a significant chilling effect.

The third concerning trend is the focus on service providers and their securities markets gate-keeping role. We see cases against administrators, custodians, lawyers, accountants, auditors, consultants, even where such service providers are not directly regulated by, or registered with, the SEC. The courts and the regulators have posited that the service providers should have responsibility for the actions of their clients; that we all have an obligation to make sure the securities markets stay clean. Service providers have responded by conducting more prospect due diligence and raising fees.  It also has the unintended consequence of raising insurance rates.  

The fourth big trend we see is a move to a super-fiduciary standard. I'm not talking about the DOL fiduciary rule. What I'm talking about is how the SEC defines an advisor's fiduciary obligations through enforcement actions. What is considered a conflict of interest? What does it mean to put yourself behind the clients interests at all times? The SEC has been raising the fiduciary bar through enforcement cases. You're seeing cases involving wrap programs, revenue sharing, pay to play, and suitability. In the recent “best interest” release which was just promulgated by the SEC, there was an overlooked companion release about an advisor’s fiduciary obligations which codifies this to a super fiduciary standard.

A fifth trend firms also cannot ignore is technology and cyber security. It’s about protecting your firm and your service providers against a third party hack. There's been cases where a third party cloud provider was hacked but, the advisor was deemed to be liable. That's causing a huge spend in the industry around systems and analysis and people. The SEC has been very clear that cyber security policy and related procedures fall within a compliance officer’s responsibilities. Not necessarily the technology components but things like corporate governance and incident response. Service provider due diligence in this area in particular are things the compliance officer has to focus on.

Hortz: There’s a lot to be concerned about! From the other vantage point of industry compliance leaders and senior managements, what was the most telling or surprising things you learned from your last financial services industry compliance survey you conducted?

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