Remember the old saying, “a penny saved is a penny earned?”  Well, that adage might be useful for teaching children the value of saving, but it doesn’t always apply to the  more important things in life.  Would you put off replacing that missing shingle to save a few dollars, while risking the greater damage of a roof leak?

As firms grapple with market gyrations and declining revenues, many are engaging in the hunt to cut costs.  It may sound self-serving for a compliance consultancy to sound the warning against looking for those savings in a firm’s compliance budget, but our caution comes from experience.  Following the market decline in 2008, a common item included in the SEC’s examination document request was the compliance budget dating back several years.  In a glance, the staff could tell whether the compliance department was operating with fewer resources in a more challenging environment, and gauge whether that warranted heightened scrutiny of the whole program.

Moreover, the SEC’s Enforcement Division has made it clear that it is adapting rapidly to the new pandemic environment, and will not let related disruptions excuse compliance failures.  In a May speech, Steven Peikin, Co-Head of the Division, emphasized the work and results achieved by the Division despite the new work environment, and stressed that the Division remained fully committed to its mandate to protect investors.  The SEC’s Office of Compliance Inspections and Examinations’ (“OCIE”) public statement on Operations and Exams stated that it remains fully operational nationwide and continues to execute on its investor protection mission.  This is evident by the recent Risk Alerts and information requests being sent out to firms on high priority issues and recently effective rules and regulations, while also continuing to conduct cause and routine exams.  Specifically, OCIE issued a Risk Alert regarding its intent to begin inspections of Regulation Best Interest and Form CRS compliance notwithstanding the pandemic, and FINRA swiftly followed suit.

More recently, OCIE issued a Risk Alert expanding its well-publicized focus on retail investors to include private funds, particularly noting deficiencies in fees and expenses disclosures, conflicts of interest, and misuse of material nonpublic information.  With the regulators remaining fully alert to compliance gaps, it only follows that firms must continue to devote the resources necessary to prevent fraud, ferret out potential rogue actors, and avoid missteps that could cost far more in lost client trust, legal fees, and fines than the expenses required to prevent these actions.

In this case, a penny saved may well be a penny burned.

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