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Compliance Program Creation/Rehabilitation


For a myriad of reasons, compliance programs can fall materially behind in their procedures, documentation and organization relative to current standards. The scope of the problems can go beyond a few hours to correct as often there are underlying structural problems that need to be addressed. Typical symptoms we see of a compliance program that needs to be rehabilitated are:
  • Management structure that permits self-supervision
  • Management that does not have dedicated compliance personnel (in-house or third party) that is charged with keeping the compliance program current
  • Written procedures that are not up to current standard
  • Written procedures that are not customized and/or do not address all business areas of the firm
  • Disorganized compliance filing system
  • Gaps in required documentation
  • Failure to implement procedures detailed in the compliance manual
  • Absence of procedures or documents for one or more compliance requirements
  • No clear system of assigning compliance responsibilities to staff members

Do any of these sound familiar to you?

These situations call for a structured approach toward evaluating, planning the corrective phases and implementing a new system of administration of a firm’s compliance programs. For firms in this position, it is wise to be proactive in seeking help and addressing the issues prior to regulatory audit. Often compliance programs in this situation contain serious problems that may force regulators to escalate their response to ensure the firm’s future compliance. Not only do these escalations cost significantly more than just committing resources to fix the problems, they also damage the firm’s reputation as the firm is required to disclose to clients and potential clients its prior failures in the compliance program.

The first step in determining the degree and depth of the problems is to get an expert assessment of the existing compliance program.  Our staff will generally use the internal inspection to conduct the assessment (which also fulfills the annual requirement for annual inspection in any case), although it can be done through other means as well. Based on the assessment, our staff will sit down with senior management to discuss the problems and make appropriate recommendations whether it is a case of several minor fixes, to several visits by a compliance professional to patch the holes, or if compliance program rehabilitation is required.

We take a methodical, structured approach towards the rehabilitation of a compliance program. After the assessment phase, it is clear what the problem areas are and the firm is placed in a process that addresses structural problems as well as documentation problems. The rehabilitation process goes through six phases to bring the firm to an appropriate level of compliance. The six phases are:

1. Assessment – as mentioned previously, an assessment is conducted to determine where and to what extent problems exist while at the same time fulfilling the annual inspection requirement.

2. Structural – if written procedures are the foundation of a good compliance program, corporate structure is the rebar that makes effective compliance possible. Reporting lines are clarified and incidences of self-supervision are eliminated (even in smaller firms).

3. Written Procedures – the compliance manual is brought up-to-date with current regulation and is then customized for the firm’s specific operations.

4. Filing System – the filing system is the reflection of a compliance program. All compliance tasks ultimately result in documentation. That documentation has to incorporate all key pieces of data, has to be organized in an effective manner, must be placed in a filing system that allows for prompt retrieval when necessary and has to be stored in an approved method of storage.

5. Procedure Implementation – the written procedures have to be implemented throughout the office. Our experience has shown that more often than not there are underutilized human resources in most firms that can be tapped to affect new compliance procedures and not have the compliance function require staffing increases.

6. Systematize the Compliance Function – THE MOST IMPORTANT PHASE IS CREATING A SYSTEM BY WHICH THE COMPLIANCE PROGRAM WILL BE ADMINSITERED GOING FORWARD. Without such a system, the firm will end up right back where it started in this process. Clear responsibilities are laid out whether it’s in-house resources or with the assistance of third parties. Very few small to mid-size firms can effectively administer a compliance program using entirely in-house resources. Conversely, it is not generally desirable (both in terms of having an effective compliance program and cost) to have a third party to entirely administer the compliance program either. Thus, firms generally find a spot between the two extremes that fits the experience level of their in-house human resources and their budget for compliance expenditures.

This approach has been used numerous times to help firms present a more professional image to clients, particularly institutional clients, as it demonstrates a knowledge and commitment to keeping clients safeguarded against unscrupulous investment firms. One of our clients once called the purchase of this process “cheap insurance” against regulatory or legal action. Indeed the cost of this program is generally smaller than all but the smallest regulatory fines and is far less expensive than any legal judgment against a firm. All it takes to get started is to commit to the assessment and thereafter a course of action can be established.

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