Why part-time compliance officers are a ‘terrible solution’

The dreaded C-word gets a bad rep in wealth management. So often the source of confusion and stories around regulatory sanctions, compliance can be a dirty word for advisors.

Vipool Desai, president of Ara Compliance, told WP that many registered firms struggle because the really interesting questions in compliance are ideas rather than hard and fast rules. For example, there is no definition of “suitability” or “concentrated position” within a certain business context. The result: the potential for a lot of interpretation and misunderstanding.

Desai said: “What I tell folks is ‘look, you need to understand the fundamental objectives that the regulators had in mind when they put together this concept rule, and make an honest effort’. More importantly, you have to understand the industry standard because when a rule is not written well, it's the industry standard that becomes the unwritten rule.”

He explained that the other reason firms struggle is because of “bad engineering”, or in other words failure around the forms, logs, record-keeping and other day-to-day processes. When that is badly done, it works against the business rather than for it.

This issue is amplified for small- to medium sized firms that often do not have a dedicated, full-time experienced compliance officer. Instead, this role is handed to the CEO, CFO or a senior manager. The work ethic is there, said Desai, but the time is not.

Regulators recently attempted to address this problem by allowing firms to hire part-time CCOs, something the president said is a “terrible solution”.

“We’re then hiring someone for a fixed fee or fixed compensation and saying, ‘oh, by the way, you're the chief compliance officer, so it's your job to apply regulation and be accountable for any issues that arise," he said. "In any situation where your upside is limited, and your downside is huge, the rational answer to [something like this that] requires nuance, thinking and judgment, would be 'no'.

 “I tell entrepreneurs you’ve got to be careful about hiring someone, a complete stranger, to come into your shop, and have this veto power over decisions that have to be made within the context of your resources, expectations, clients, your employees, and your long-term plans. We’re asking for trouble when we have part-time compliance officers.”