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Compliance Is Everyone's Business

By Rita Raagas De Ramos June 14, 2017

A culture of compliance must originate from the CEO and senior managers of an advisory firm, and this must be clearly relayed to the rest of the practice, according to two industry veterans.

“The tone at the top” is crucial and “can spell the difference” in determining the successful integration of a compliance culture in advisory firms, Jack Brennan, chairman of Finra’s board of governors and chairman emeritus and senior advisor at Vanguard, said last month at Finra’s annual conference in Washington, D.C. Brennan has been in the industry since 1982, when he first joined Vanguard.

A firm’s CEO is the “face of the organization, the figurehead to whom employees ultimately look for vision, guidance, and leadership,” Deloitte says in a report on world-class ethics and compliance published in 2015. “The tone at the top sets an organization’s guiding values and ethical climate. Properly fed and nurtured, it is the foundation upon which the culture of an enterprise is built.”

Bryan Sullivan, San Luis Obispo, Calif.-based CEO of WealthSource Partners, which manages around $600 million in client assets, couldn’t agree more. He spent 17 years working as an advisor at Edward Jones, Merrill Lynch and UBS before breaking away to establish Vellum Financial, an RIA, in 2009, and then later merged it with another RIA, Avant-Garde Advisors, to form WealthSource. He says he wanted to veer away from the “complexity and opacity” of large broker-dealers to establish an RIA that was simple, transparent and client-centric.

He says he was “frustrated with the culture of those big corporations,” and the financial crisis of 2008 was the last straw. “They were not really committed to the individual clients. They were committed to the shareholders and the bottom line.”

WealthSource’s Sullivan cites chief compliance officer David Ito as proof of the importance of a compliance culture in his firm. Ito had 11 years of experience as an examiner at the SEC before joining Vellum and, eventually, WealthSource. While he was at the SEC he served in many roles – from a securities compliance examiner to an assistant regional director of the investment advisor examination group at the regulator’s Los Angeles regional office.

Bryan Sullivan

Finra’s Brennan said a chief compliance officer should be held in high regard at an advisory firm and should be considered among the senior leaders of the firm. “A CCO needs to be in the CFO’s face, period.”

Advisory firms should never underestimate the importance of gaining and maintaining their clients’ trust, he said. “Most of the calamities we’ve seen in our industry started from the top,” he said, referring to a weak compliance culture emanating from either the CEO or senior managers.

People in the advisory industry should stop thinking of the answer to the question, “What’s in it for me?” and instead think of what’s in it for their clients, he said. “Compliance should be a natural part of the conversation. It should be in the DNA of every firm.”

Deloitte notes that reputational risks are at least as great as strategic, operating and financial risks.

“Sometimes all it takes is a rumor or hint of impropriety or malfeasance, or a social media post gone viral, to negatively impact shareholder value and damage -- or worse, destroy -- corporate and brand reputations in an instant.”

CEOs and senior managers must find ways to connect with people inside and outside their organizations, and openly communicate their values on an ongoing and transparent basis, Deloitte says.

“People are suspicious of leaders who are closed about their values or standards. Stakeholders assume if you value nothing, you’ll value anything,” Deloitte says. “While leaders must establish core values and principles, a CEO’s behavior tells employees what counts, and what’s rewarded and punished. Unfortunately, many companies under-communicate values by a significant factor.”