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This Executive Summary was prepared exclusively for distribution to professionals who participated in the survey. Please do not distribute it outside of your firm. Other distribution is not authorized. Entire contents © 2004, D.M.R., Inc.
This summary was updated on 10-27-04 to show final survey results for:
Complete Report:
If you find the executive summary useful, you will find more information in the final report, available for purchase.
Benefits: The final survey report will serve as a valuable resource in helping firms benchmark their budgets, staffing plans and audit practices against industry peers. Findings will help firms develop or modify their compliance support functions for improved effectiveness. The report will also serve as a useful reference for staff training and for communicating compliance program details to senior management. Pricing: Before 11-15-04: IntroductionOn August 18, 2004 Diversified Management Resources, Inc. distributed a survey, “Compliance 2004,” soliciting securities industry professionals’ views on a variety of subjects. These included: · The status of their preparation for new compliance regulations effective October 5. · Their experience with the USA PATRIOT Act. · Budget and staffing impact and plans for their corporate compliance function. · Issues they have faced in defining and communicating compliance standards for their firms. The survey was distributed via email to proprietary contact lists and through a selective emailing to NICSA members involved in securities compliance functions. It was also promoted on various web sites, including Money Management Executive and the site for the annual IIR AML Conference. Participants The survey offers a broad look at securities industry professionals’ opinions about key compliance-related concerns today. Participants work for all types of securities firms and represent all major job functions. Measured by AUM, the 150+ firms represented in the results include smaller, mid-size and larger asset managers. All participants are employed in the securities industry. Employees of firms best described as Investment Company – Mutual Funds represented the most prominent group (27%). Of the other specific company types represented, employees of firms combining Broker –Dealer, Investment Company and Mutual Funds were second in participation (19%). Some 9% of respondents work for Financial Institution / Banking firms involved in distribution of investment products. The questionnaire asked for information about investment firms’ Assets under Management (AUM). The largest category was $1 billion to $50 billion, represented by 34% of participants. Those with AUM exceeding $100 billion represented 23%. Job functions By job function, categories most often selected were Chief Compliance Officer (21%), followed by Compliance Staff (20%) and Operations Director (18%). Corporate titles The most common corporate title was Vice President (32%). This was followed by Manager (18%), Managing Director (14%) and Sr. Vice President (13%). Survey tracks Depending on
the type of employer and job function, participants were automatically directed
to separate, defined tracks in survey questions. Specific, separate tracks pertained to those
involved in preparing for the October 5 deadline, supporting response to the
USA PATRIOT Act and budget and staff planning. Those not involved in supporting
these specific functions were directed to a final section of the survey,
soliciting their views about the general status of compliance programs in
the securities industry and asking about the resources they find most useful in
keeping up to date on compliance matters. Structure of the compliance functionMost firms (61%) have set up a centralized compliance department. Fourteen percent were reported to be enterprise-wide, with a corporate function centralized with a parent company in the case of multi-division or international firms. A majority of Chief Compliance Officers report to either the President (35%) or a Senior Vice President (25%). Asked about their own backgrounds prior to joining the Compliance Staff, one half had most recently worked in Operations, and a majority had been promoted from within their firms. How they spend their time Compliance professionals spend more than 60% of their time developing new compliance procedures and testing conformance with existing requirements.They spend about one-fifth of their time investigating potential violations. Asked about the relative difficulty of various aspects of their roles, compliance professionals said enforcement and testing were most difficult. Compliance ProgramStatus Firms reported they were well prepared for the October 5 deadline. Virtually all had designated a Chief Compliance Officer, though 32% had not yet determined where the CCO would report in their organization. Challenges The most challenging compliance responsibilities firms are addressing today are those for which the deadline is imminent—SEC Rule 38 (a)-1, Compliance Programs for Registered Investment Companies and Rule 206(4)-7, Compliance Programs for Investment Advisers Compliance professionals report they continue to review other rules, including AML, Sarbanes-Oxley and Customer Identification Program requirements. The October 5 regulations have posed many challenges for investment companies. A text question on this point attracted heavy response, with comments typically focused on three factors:
Smaller firms focused on high incremental costs and pressure on existing staff. Expenses and resourcesLooking at the relative costs of preparing for October 5, firms will spend the most on existing staff allocated to the project. Nearly 50% said internal staff cost would range from $10,000 to $50,000. Ten percent said their allocated staff costs would exceed $100,000. Anticipated Legal costs varied. Most expected to spend less than $100,000. Firms also reported use
of third party compliance companies, though 60% said they would spend less than $50,000 on this activity. USA PATRIOT ACTChallenges Systems and technology requirements associated with USA PATRIOT Act compliance were ranked as most difficult by 41% of respondents. The overall task of creating a compliance culture to support AML requirements was second in difficulty. Other requirements, such as staff training and obtaining senior management support, were less difficult. Overall compliance cost was rated the most difficult challenge by one fifth of respondents, though most rated this factor only moderately difficult. Vendor Selection was the least difficult challenge faced in responding to CIP requirements. Expense Nearly 40% report their total USA PATRIOT Act compliance program had incurred a small cost to their firms, with expenditures of less than $50,000. However, for others, the cost is substantial, with 18% spending from $100,000 to $1 million; 8%, more than $1 million. Resources More than 70% of respondents said their firms have adopted an automated solution for CIP requirements. A substantial majority are “generally satisfied” or “satisfied” with their success rate in customer identification. One half said their firms integrate the CIP function with fund service providers. In most cases where standalone service providers are used, these are not involved in AML transaction monitoring. In
selecting CIP vendors, firms are most concerned with reporting accuracy. This
is followed by integration with Transfer Agent functions, audit capabilities
and cost. BudgetingGeneral Trends 35% of firms reportedly increased their compliance budgets by 25% or more this year over last. An equal percentage reported an increase of 50% in their compliance spending. This growth will continue through 2005. StaffingHeadcount When asked how many professionals were on their compliance staff as of January this year, the mean answer was seven. This was driven upward by several firms with staffing at much higher levels. More typically, compliance staff size was five or fewer. 59% of firms added to their compliance staff this year. The same number said further increases are planned in 2005. CCO candidate requirements As expected, most firms will require previous compliance or other relevant business experience in CCO candidates recruited from outside. Operations experience is also considered desirable. Expected compensation Respondents were asked to indicate how much they would expect to pay a CCO. Thirty-one percent of those exposed to this question expect to pay cash compensation of $300,000 or more, the single figure most often cited. Twenty-four percent say expected compensation would be from $100,000 to $150,000. Recruitment methods and practices Consistent with general business practice, respondents said employee referrals would be their most significant means of recruiting compliance professionals. Retained search firms were second as a recruiting source. One-half
also said they were likely to use online job boards, either general or
specialized. Auditing compliance functionsService provider insight Most service providers will furnish written reports and documentation of methods through which they will ensure compliance. Seventy-five percent are also obtaining third party certification (e.g. SAS 70) How failures are communicated In addition to CCOs, supervisors (53%) and CEOs (37.8%) will be made aware of potential compliance violations. In only a few cases will compliance standards be formally integrated with employee performance reviews. Compliance teams were regarded as the most likely groups to detect potential violations. This was followed by Operations, Legal and Internal Audit, respectively. “Auditing the auditors” Internal
Audit departments were cited most frequently as the groups responsible for
monitoring compliance by members of the compliance staff. Outside auditors, Legal Counsel and third
party firms were also mentioned. Several
firms have reported they have not yet determined responsibility for this task. Compliance CultureKey requirements for success Consistent enforcement, having adequate staff and employee training were selected as the most important factors in developing a compliance program. Few said rewarding people who report potential violations was a significant factor. Determinants of success included CEO support and instilling a compliance culture, followed by “consistent expectations.” Communicating and supporting standards Standards and specific compliance program requirements have been most often communicated through a combination of management and staff meetings. The Operations department was felt most likely to proactively support compliance requirements; Sales, the least likely. Keeping informedSources of information Respondents used a variety of methods to maintain awareness of compliance issues. Publications and online resources were said to be of most value, followed by seminars and conferences. Publications Prominent, general interest industry publications were read by many, though more were cited as “essential reading” by any substantial number. More specialized resources, such as the SEC web site and reports by consulting firms, were reported as most useful. Conferences Among
useful conferences, those sponsored by the ICI, NICSA and NASD were reported to
offer the greatest value. Looking aheadA series of questions asked participants to choose among potential compliance or related failures and indicate those that are most likely to occur. Among the choices provided, greatest likelihood was attributed to “Favoring one client, wrongly or unfairly, above others.” “Material misstatements about a firm’s products and /or services” was second on the list, nearly tied with market timing. Identity Theft was viewed as somewhat less likely. More than 70% of respondents said they thought current securities industry compliance programs were “very good” or “excellent;” 72% saw an “insignificant gap” or “no gap” between stated compliance standards and day-to-day business practice. Ultimately,
professionals are confident their internal controls and compliance functions
will be effective. More than 80% anticipated that over the next twelve months a
firm’s compliance staff rather than regulators would detect any significant
securities violations. SummaryMost firms have by now established the operating structure and information resources required to adapt to additional regulatory requirements. They are confident that their compliance programs will be adequate to detect potential violations. The growing role of compliance as a core business function has been well recognized. Budget allocations are increasing and firms widely report plans to build their compliance teams. Compliance professionals recognize the challenge of creating and supporting an effective “compliance culture.” This task will require ongoing funding, as well as new surveillance measures and reporting functions. Smaller firms are feeling an increasing burden responding to the complex demands of new regulation.
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This Executive Summary was prepared exclusively for distribution to professionals who participated in the survey. Entire contents © 2004, D.M.R., Inc. All rights reserved. |