Businesses like investment advisers have a fiduciary duty to put their clients’ interests ahead of their own. As your company creates a compliance plan, keep in mind that the Securities and Exchange Commission (SEC) has often emphasized that the key to a successful program is having a strong culture of compliance embedded in the firm.

It is not sufficient to have policies and procedures for all employees; it is critical that they understand their compliance obligations and apply them on a daily basis in the best interests of their clients.

According to many industry experts (including the SEC’s current OCIE director), establishing defined expectations from the top of the organization down, as well as an overall environment that fosters ethical behavior and decision-making, is integral in a compliance program’s overall success.

Simply put, organizations should instill an obligation to do what’s right within every employee. This will underpin all that the firm does and must be part of the essential ethos of the firm. So, when employees make decisions — large or small; regardless of who’s in the room, and whether lawyers or regulators or clients or anyone else is looking — they are guided by an ingrained business culture that reinforces doing what’s right.

It’s important to understand that a firm’s culture of compliance exists outside the compliance department — it should live throughout the firm. Understanding these considerations, most firms are now also implementing a new practice known as the “mood in the middle,” which encourages mid-level managers to be trained to supervise the firm’s compliance requirements for their teams.

 

Tone at the Top

What does it mean for a firm to have an established “tone at the top?” The phrase refers to a uniform strong message regarding the importance of compliance from the head of the organization or the highest level in the firm. Usually this is initially established by the CEOs, the Board of Directors or managing partners of a firm that believe and preach the importance of compliance.

This, in a sense, establishes the right “tone at the top.” When senior management shows the organization’s overall buy-in on compliance and creates a call to action, it establishes the firm’s need for a highly ethical culture that results in the “culture of compliance.”
Executive leadership and senior managers across the organization should encourage employees and business partners to behave legally and ethically, and in accordance with compliance and policy requirements.

Employees across the firm need to feel comfortable in coming forward with any legal, compliance, or ethics questions and/or concerns without fear of retaliation.

Organizations should reward and promote their talent based, in part, on their adherence to the firm’s ethical values. Smart and moral business practices are expected and should be rewarded; additionally, firms need to also consider rewarding employees who report unprincipled business activity or report when an error or violation is committed (self-reporting).

CCOs should be part of critical committees within the firm. The CCO should be empowered with the authority to implement the compliance program, and should be provided enough internal and/or external resources in order to construct an ideal culture of compliance.
Regular and consistent messaging from the CEO reminding employees of the organization’s expectations toward compliance can help reaffirm the importance of compliance.

 

Factors for Demonstrating a Strong Culture of Compliance

Creating and maintaining a strong culture of compliance requires sustainable effort within any firm. Applying the “rule of minimums” within the organization will help reaffirm and strengthen the messaging throughout the business year. This could include the simple implementation of periodic training for all directors, officers, and employees, which could include topics covering compliance policies and procedures, relevant laws, and best practices that encounter ethical decision making.

Training and Communication

  • As part of the onboarding process, it should be mandatory that new employees attend or receive compliance orientation/training to discuss the firm’s compliance policies, procedures and Code of Ethics.
  • To stay abreast of business model changes or developments within the business, firms should develop a mandatory firmwide annual compliance training, covering all high-risk compliance areas of the firm.
  • Firms should implement on-going and regular communications about regulatory matters and SEC enforcement actions that would be pertinent to the employees (insider trading, Code of Ethics etc.).
  • Organizations should also offer ad-hoc training for high risk business areas (sales, portfolio managers, traders).
  • The addition of an annual or biennial (every 2 years) training for investment teams and sales staff by an industry expert provides additional insight to compliance needs within firms.
  • Firms should ensure that all compliance policies and procedures are easily available to the employees (for example, via an intranet).
    Compliance programs should include training for employees as to not to make isolated decisions on compliance matters.
  • Not as an afterthought, but the implementation of a professional compliance mentorship program provides firms with a developing compliance program for the future.

Governance

  • Organizations should consider the addition or creation of a compliance or ethics committee, which can provide oversight of the overall compliance program and should include members from the C-suite.
  • To reinforce messaging, human resources should include ethics and compliance as part of individual annual performance reviews.
    Firms should include ethics as an integral part of the organization’s mission statement.
  • A strong governance structure will present and be documented with formal charters, which can establish the tone of compliance at any firm.

 
Investment advisers and other businesses are tasked with ensuring that they always act in the best interest of clients. There are many elements to a strong culture of compliance that can promote behavior to assist businesses growth and achieve the organizational and regulatory goals. A strong culture of compliance also can be an indirect revenue source, as it maintains a firm’s great reputation and preserves assets.

 
Tito Pombra is the president of Core Compliance & Legal Services, Inc., a compliance consultation firm which services broker-dealers, registered investment advisers, hedge funds, private funds, investment companies, and financial professionals.

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