Building the Right Team
Passauer points out that building a compliance department may not come cheaply. "The cost of compliance has gone through the roof," he says. "A lot of these one- and two-man shops out there have had to file BDW [broker-dealer withdrawal from SEC or SRO registration] in the last five years because they can't compete with the larger firms that have their own compliance departments."
One vendor has come up with a solution for smaller mutual funds in search of compliance: outsourcing a CCO. As part of its ComplianceEdge program, New York City-based Bisys offers to supply a CCO and supporting compliance team to meet the needs of the fund, a strategy that the SEC has granted its blessing to.
The vendor's team of CCOs, which will total four or five, already consists of Frank Pavlak, the former chief compliance officer for Oppenheimer Funds, and Fred Schmidt, a veteran of Credit Agricole Indosuez. The CCOs will serve a range of about 35 mutual funds, which makes up about half of all of the funds taking advantage of Bisys' ComplianceEdge program, says Fred Naddaff, president of Bisys Fund Services. "It seemed to be a natural extension of our services. It's just taking advantage of economies of scale," he notes. "But we will only offer the CCO service to our full-service clients, where we have control over the entire compliance process."
Naddaff says that the CCOs, who report to their firms' boards and are covered under their funds' insurance, will have full liability for the compliance of their funds. BB&T Funds of Winston-Salem, N.C., and Pacific Capital Funds of Honolulu have signed up for the CCO service, Bisys reports.
Will the new technique spread throughout the industry? Even Naddaff isn't sure. "The jury is still out," he observes.
Getting to Work
Whether the compliance team is internal or external, certain similarities in duties exist throughout the industry, with priorities driven by regulators. One chief compliance officer from a New York City-based broker-dealer says that the most pressing project on his plate is whatever he hears that regulators are inspecting that year. "Regulators leave no stone unturned and will not exit any exam until they find something wrong," asserts the CCO, who requested anonymity.
Luckily, the CCO continues, "Although there is a lot of competition on Wall Street, when it comes to compliance, there is a lot of cooperation and sharing of what types of exams regulators are doing and what best practices are."
Passauer agrees that this inter-industry collaboration is helpful to his success, and he hopes an industry group for compliance officers can be established. "I'd love to bounce some of my ideas off some of my peers," he says. "The more that we can share ideas with each other, the better off all of us would be."
Passauer says e-mail archiving and anti-money laundering are at the top of his to-do list. He also stresses the importance of data management, a project that PAFA's parent firm, Pan-American Life Insurance, has begun to address using its IT resources. PAFA recently signed on with Statement One, a Lawrenceville, N.J.-based accounting and reporting vendor, to help PAFA create customized compliance reports, says Rachael Schorr, president of PAFA. Those reports, she says, will work alongside a new proprietary data warehouse that Pan American Life Insurance's IT department is helping PAFA develop. "We're gearing our data more towards meeting regulatory data requirements. A data warehouse was the answer for us," Schorr says.
According to the anonymous CCO, however, getting the technology needed to support compliance projects is not always easy, particularly in a large firm. "Technology resources are stretched at most firms, depending upon the project and what else is going on at the firm," he laments. "Unfortunately, many firms see compliance as an expense and not a profit center. But once a firm gets hit by a large fine, then it will look at compliance."
Michael Brown, president of BD Solutions Consulting, says that firms will find greater success if compliance officers and chief information officers make concessions to understand each other better. "If there's one thing that compliance officers are not good at, it's understanding technology. And if there's one thing that CIOs are not good at, it's understanding compliance. They're in a standoff," he says. "They have to educate each other. That's the piece that's missing."
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