Sudden Spikes in Assets Under Management (AUM) or Client Counts May Lead to Compliance Headaches

Sudden Spikes in Assets Under Management (AUM) or Client Counts May Lead to Compliance Headaches 1

Isabella Aslan

All Registered Investment Advisors dream of landing that huge client or wrap platform, but RIAs need to ensure they have adequate compliance support to match.

LOS ANGELES, CA, USA, July 12, 2022 /EINPresswire.com/ — A recent survey by the Investment Adviser Association (IAA) shows that among a sample of 425 firms, over half have a Chief Compliance Officer (CCO) that wears multiple hats within the firm. According to this same survey, around 80% of firms have five or fewer compliance staff members.

In light of these recent figures, Registered Investment Advisors that fall into either of these groups need to ask themselves, “How quickly could we scale up our compliance program if we land that big institutional client, or if we start getting hundreds of accounts from that new wrap platform?”

Current market conditions may make it hard for some investment managers to imagine that glorious day, but as assets shift precipitously from one sector or security type to another as investors try to find a safe haven for their capital, it is inevitable that asset managers in certain spaces will see sizeable influxes of clients and cash. Accordingly, these firms will need to ensure their compliance and operational infrastructure can meet new demand.

AUM growth presents different challenges to different firms. For state-registered investment advisors who are suddenly vaulted above the $100 million AUM mark, they will need guidance navigating registration with the Securities and Exchange Commission (SEC), and may also need to appoint a Chief Compliance Officer if they do not already have one. For SEC-registered firms with compliance programs already in place, they may need to revamp their back office systems and compliance monitoring systems to accommodate new asset and client types. Policies and procedures may need to be updated to satisfy new client requirements and new trading processes. Employee conflict of interest monitoring may need to include new security watchlists or preclearance rules.

Now, more than ever, with new clients come new, customized due diligence obligations that require RIAs to submit monthly, quarterly and annual responses to consultants and dedicated due diligence teams. Upper management often neglects to consider the imminent burden of the reports that new clients request, or assumes staff can simply cut and paste answers from reports they complete for existing relationships. However, there is no uniform or industry-standard questionnaire, so staff must “reinvent the wheel” and craft new responses for each request, no matter if the questions are inherently similar among clients.

Clients are more attuned to compliance considerations than in prior years, and no longer see due diligence reports as simple, “tick-the-box” exercises. They expect tailored, relevant and thoughtful answers to their compliance questions. Wrap platforms scrutinize RIA responses, as wrap sponsors routinely collect these questionnaires as part of their regulatory books and records, often after receiving citations for deficiencies related to trading and allocation practices, best execution violations or client fee issues. Given this heightened interest in due diligence responses, firms should have a dedicated point person or consultant who is immediately available to address client feedback and clarify or expand upon questionnaire responses.

How can firms with five or fewer compliance staff avoid compliance headaches and meet increased demand? They can go the traditional route of adding staff, but they can also engage an external consultant to provide outsourced services and support to existing staff. “Most compliance challenges that are new to an investment management firm are not new to someone else,” Isabella Aslan, a compliance consultant commented Tuesday. “It is possible to find someone who has met similar challenges and can help absorb the burden of regulatory and due diligence tasks.”

Isabella Aslan Compliance Consulting focuses on the compliance needs of investment managers. Ms. Aslan’s practice covers a wide range of regulatory issues, including SEC registration; Rule 206(4)-7 annual reviews, Form ADV and CRS filings, marketing material reviews, cybersecurity and business continuity planning, books and records management, trading and client guideline checks, ESG adherence, conflicts of interest, custody, policies and procedures, social media review, employee compliance monitoring, onsite and remote mock exams, and audit preparation. She additionally assists with ’40 Act Funds compliance, due diligence reviews and requests for proposal (RFPs).

A native of Los Angeles, Ms. Aslan started her career with Merrill Lynch’s Century City office, and moved on to positions at local investment advisory firms, spending many years in VP and CCO roles. Ms. Aslan is a graduate of Wellesley College and Loyola Law School, Los Angeles. She holds an IACCP designation from National Regulatory Service (NRS) and a Certificate from the Principles of Responsible Investing (PRI) Academy, an investor initiative in partnership with the UNEP Finance Initiative and UN Global Compact.

For inquiries, please reach out to iacompliance@tutanota.com.

Isabella Aslan
Isabella Aslan Compliance Consulting

Sudden Spikes in Assets Under Management (AUM) or Client Counts May Lead to Compliance Headaches 2