The Cost of SEC Compliance

by | Sep 30, 2013 | Fee Only Financial Planning, Weekly Column

DollarSignShieldSword“I’m the auditor, and I’m here to help you.”

Now, there’s a phrase to send cold chills down anyone’s spine. It doesn’t matter whether you’re a taxpayer, a company with government contracts, or a financial planning firm. Having an auditor show up feels a lot like being one of the Three Little Pigs and seeing the Big Bad Wolf on your doorstep.

In our office recently, however, the auditor really was there to help us. We had invited him. In fact, we were paying $5,000 for the privilege of having our Los Angeles-based compliance attorney go through our files and procedures in painstaking and time-consuming detail.

Kathy Arlaud, our compliance manager, spent most of a week rounding up documents, creating spreadsheets, and bugging her co-workers for mind-numbing details. The day of the audit found our team dutifully answering questions about everything from our investment practices to our security and our money laundering policies. (In case you were wondering, no, we don’t launder money).

We spend a lot of time and money complying with SEC regulations. Our compliance attorney costs around $1,000 a month. We spend $500 a month backing up all of our social media postings, emails, and our website. This is essentially to prove that on any given day we didn’t guarantee someone an investment return. Staff time and other associated expenses come to another $1,500 a month. The total is around $4,000 a month.

Since 2009 the government has added some 13,000 new rules. Of these, 330 were “major” economic rules. Another 739 affect small businesses. There are 3,503 more new federal regulations in the pipeline, including many contained in the Dodd-Frank bill passed in July 2010. Based on industry reports and estimates, if the SEC enacts all the provisions of Dodd-Frank, our monthly compliance expenditures will double to $8,000 a month.

Our recent audit resulted in a number of unwelcome changes to our operation. For a while it even looked as if we were going to have to fire our office cleaners. I was greatly relieved that we were able to keep them, since vacuuming is not among my special talents.

Unfortunately, we will have to make most of the other changes the auditor recommended. The most frustrating ones will require us to reduce services to our clients. This is especially hard since we continuously look for ways to expand our services and add more value.

As just one example, we will no longer be able to assist clients with opening, closing, or updating selected client accounts. These include 401(k)’s, annuities, bank accounts, 403(b)’s, 457’s, and 529 college funding plans.

Here is why. For a registered independent advisory firm to open or update accounts like these, clients need to give the advisors access to the accounts, typically by sharing user IDs and passwords. If this access allows the advisors to also take actions like transferring funds, updating addresses, or changing beneficiaries, the SEC now calls this “having custody” of those accounts.

For most independent investment advisors, complying with the requirements for custodial accounts would mean adding a new layer of costly compliance and audit requirements. Instead, many will discontinue the services that cause accounts to be categorized as custodial. Instead of managing these accounts ourselves, we will have to limit our service to teaching clients how to do so.

This is just part of the unintended cost and consequence of our government protecting us. About five cents of every dollar our clients pay in fees currently goes toward complying with federal regulations to protect our clients from ourselves. Increased compliance regulations, meant to add more protection, will only increase that cost.

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