Post Summary
Convergence analysis of 7,106 manager groups found that 22 percent have one person serving as both CEO and CCO, reducing the compliance capacity available to address increasing regulatory requirements at precisely the firms where compliance complexity is most likely to be growing.
As of June 20, 2016, nearly 7,000 private fund advisers had collectively filed nearly 10,000 Form ADVs, with 2,000, or 29 percent, having already filed more than once that year. Filing volume increased by 3,669 filings in H1 2016 compared to H1 2015, a trend Convergence correlates with higher complexity and regulatory pressure.
Convergence analysis indicates that an investment adviser with $250 million or more in AUM generating approximately $5 million in management fees at a 2 percent fee rate should have sufficient cash flow to support a dedicated CCO with an all-in compensation package of approximately $250,000.
In 2016 the number of regulatory regimes disclosed by advisers experienced a net increase of 350, indicating that compliance complexity is expanding across the adviser population as firms take on new regulatory obligations that each carry distinct requirements.
Convergence tracked 39 regulatory violations and 4 civil violations disclosed by the SEC in Form ADV in H1 2016, compared to 38 advisers disclosing new violations in H1 2015, indicating that violation rates were largely static even as filing volume and regulatory complexity increased.
Last month, Thomson Reuters regulatory intelligence experts Stacey English and Susannah Hammond produced a report indicating that Compliance Officers are facing higher levels of regulation paired with stagnant resources. The study shows that skilled compliance individuals are creative by nature, having to do more with less, however this “creativity needs to give way to innovation, if not revolution, in terms of how limited compliance resources are deployed,” (p. 26). The authors also imply that technological innovation in the compliance space has lagged behind due to a lack of funding, which if paired with skilled officers could save firms more in the long term. At Convergence, we’ve seen the risks created by increased regulation and wanted to add our insights into this important topic.
Regulatory Fatigue
In their “Cost of Compliance” study, English and Hammond reported that “Compliance Officers are clearly still experiencing regulatory fatigue and overload in the face of ever-changing and growing regulations. Consistent with the previous year’s expectations, 69 percent of firms (70 percent in 2015) are expecting regulators to publish even more information in the coming year, with 26 percent expecting significantly more,” (p. 3). Although we cannot quantify fatigue, we can expect that C-Suite individuals that serve as Chief Compliance Officer in addition to another executive role, or “multi-functional executives”, are feeling the heat of increased regulation more so than ever. In Convergence’s database we found that 22% of a total 7106 Managers Groups have one person as both CEO and CCO, giving them less capacity to address compliance and regulatory concerns. Growing Advisors should consider separating the Chief Compliance Officer (“CCO”) role from other C-Suite roles because complexity evolves as the firm grows. For example, an Advisor with $250 million or more in AUM that will generate $5 million in management fees (assuming a 2% management fee) should be generating sufficient cash flows to separate the CCO role (assuming an all-in compensation package of $250 thousand).
Increased Levels of Regulatory Filings
Another finding in the Thomson Reuters report found that “More than a third of firms continue to spend at least a whole day every week tracking and analyzing regulatory change. There has been a gradual decline in firms spending more than 10 hours tracking change every week, whether due to efficiencies or resource constraints. That said, there has been no letup in the volume of regulatory change that firms need to track,” (p. 3). Convergence found that almost 7,000 Private Fund Advisors had collectively filed nearly 10,000 SEC Form ADV’s as of June 20, 2016. Two-thousand, or 29 percent, of these Private Fund Advisors have already filed more than once this year. For all Advisors (including Non-Private Funds), we found an increase of 3,669 Filings in the first half of 2016 compared to the first half of 2015. Our research indicates that higher filing rates are correlated with higher complexity and increased regulatory pressures.
Greater Regulatory Risk
At Convergence, we track daily changes in Regime Disclosures as well as all Regulatory, Civil, and Criminal Violations reported by the SEC. Based off the respondents in the special report, it’s clear the industry is anticipating greater regulatory risk and movement toward a more compliant culture. The report claims “The main reason given for the expected increase is the regulatory focus on conduct risk, which is echoed by the fact that 74 percent of respondents expect more compliance involvement in the implementation of a demonstrably compliant culture and tone from the top in the coming year,” (p. 20). Since each Regulatory Regime has unique characteristics and compliance requirements, we believe disclosing new regimes may increase risk for Advisors. In 2016, the number of regulatory regimes disclosed by Advisors experienced a net increase 350 regimes, indicating expanding compliance complexity. So far this year we’ve seen 39 Regulatory Violations and 4 Civil Violations disclosed by the SEC in Form ADV. In the first half of 2015 we saw 38 Advisors disclose new Violations compared to 37 Advisors this year, so violations have been somewhat static.
Source:
- English, Stacey, and Susannah Hammond. Cost of Compliance 2016. Rep. Thomson Reuters, 12 July Web. 12 July 2016.
Key Points
What does the 22 percent multi-hatted CCO finding reveal about compliance governance in asset management?
- Scale of the problem: 22 percent of 7,106 manager groups, representing more than 1,500 firms, have one person serving simultaneously as CEO and CCO, a structural governance arrangement that concentrates compliance accountability in the executive most likely to be stretched by competing priorities.
- The capacity constraint is not theoretical: A CEO managing investor relationships, capital allocation, strategy, and business development while simultaneously owning compliance oversight, examination readiness, and regulatory filing quality is operating with a finite and divided attention budget at precisely the moment both functions are most demanding.
- Complexity amplifies the risk: The firms most likely to have a multi-hatted CCO are earlier-stage or smaller advisers, but complexity does not scale linearly with size. A growing firm with a combined CEO and CCO role is accumulating compliance obligations faster than it is adding compliance capacity.
- The SEC is paying attention to governance structure: SEC examination priorities consistently include compliance program adequacy, and a single executive holding both roles is a governance signal that examiners are trained to notice and probe.
- Convergence measures this across the full market: Because this finding comes from Form ADV disclosures across 7,106 manager groups, it reflects actual governance arrangements filed with the SEC, not self-reported survey data. The 22 percent figure is a market baseline against which any individual firm can benchmark its own structure.
At what point does separating the CEO and CCO roles become financially necessary?
- The $250M AUM threshold as a practical benchmark: Convergence analysis indicates that a firm with $250 million or more in AUM generating approximately $5 million in management fees at a 2 percent fee rate has the cash flow to support a dedicated CCO with an all-in compensation package of approximately $250,000, making the separation financially practical rather than aspirational.
- The cost of not separating scales faster than the cost of separating: A compliance failure at a firm with $250M in AUM carries regulatory, reputational, and client retention consequences that dwarf the cost of a dedicated CCO. The economics of separation favor acting before the complexity event rather than after.
- Fee compression changes the math: As management fee rates compress across the industry, the $250M threshold may shift upward. Convergence's benchmarking infrastructure allows firms to calibrate this threshold against current peer data rather than a static rule of thumb.
- Complexity is a better trigger than AUM alone: A firm with $200M in AUM managing a single strategy has a different compliance obligation profile than a firm of the same size managing multiple strategies across multiple jurisdictions. AUM is an indicator, not a determinant. Complexity is the more precise measure.
- The separation decision is a risk management decision: Firms that separate the CCO role before they need to are making a proactive risk management decision. Firms that wait until after a compliance failure are making a reactive one.
What does rising ADV filing volume reveal about compliance pressure across the adviser population?
- Filing volume as a compliance stress proxy: Convergence found a 3,669-filing increase in H1 2016 compared to H1 2015 across all advisers, a volume increase that correlates with higher complexity and regulatory pressure rather than routine business growth.
- Repeat filers as a concentrated stress signal: 2,000 of nearly 7,000 private fund advisers, or 29 percent, had filed more than once in the first half of 2016 alone. Advisers filing multiple times within a single year are most likely correcting prior errors, responding to material business changes, or managing regulatory requirements that exceed their original filing capacity.
- The correlation between filing frequency and complexity is structural: Firms with more complex regulatory obligations, more fund structures, more regulatory regimes, and more organizational changes generate more filing events. Convergence tracks this correlation continuously, making filing frequency a real-time proxy for compliance complexity across the population.
- Volume increase without violation increase indicates compliance effort, not compliance failure: With violation rates essentially static at 38 to 39 advisers disclosing new violations, the filing volume increase reflects compliance activity rather than compliance breakdown. Firms are filing more because their obligations are growing, not because they are failing.
- The trend line matters more than the snapshot: A single year's filing volume is context. Multiple years of filing volume trends, which Convergence tracks longitudinally, reveal whether complexity is accelerating, stabilizing, or declining across the population.
What does regulatory regime disclosure activity reveal about compliance complexity trends?
- 350 net new regimes in 2016: The number of regulatory regimes disclosed by advisers experienced a net increase of 350 in 2016, indicating that the compliance obligation landscape is expanding at a measurable rate across the adviser population.
- Each new regime carries distinct requirements: Unlike a simple regulatory update that applies uniformly, a new regulatory regime introduces a distinct set of compliance requirements, reporting obligations, and examination risks. Firms disclosing new regimes are taking on qualitatively different compliance obligations, not just more of the same.
- Multi-regime advisers face compounding complexity: An adviser operating under multiple regulatory regimes simultaneously must maintain compliance across frameworks that may have conflicting requirements, different examination cadences, and distinct reporting standards. Convergence tracks regime disclosure changes as part of its non-investment risk profiling infrastructure.
- Regime expansion is a leading indicator of resource strain: The combination of multi-hatted CCO arrangements and expanding regulatory regime exposure is a governance risk pattern. Firms adding regulatory regimes without adding compliance capacity are accumulating risk that is visible in the filing data before it surfaces in examination findings.
- Convergence monitors regime changes daily: Because regime disclosures appear in Form ADV filings, Convergence captures additions and changes as they are filed, providing a real-time view of how compliance complexity is evolving across individual firms and across the market.
How should firms use compliance complexity data in governance and risk decisions?
- Benchmark governance structure against the market: The 22 percent multi-hatted CCO figure is a market baseline. A firm with a combined CEO and CCO role should assess whether its compliance capacity is adequate relative to its peers at a comparable size and complexity level, not just relative to its own prior year.
- Use filing frequency as an internal early warning signal: A firm whose own filing frequency is increasing relative to its peer group is accumulating compliance complexity faster than baseline. That signal is worth investigating before it surfaces in examination findings or client due diligence.
- Monitor regime disclosure changes at client and counterparty firms: For allocators and auditors, a firm adding regulatory regimes is signaling increasing compliance complexity. Convergence surfaces those additions as they are filed, providing a real-time view of how a firm's compliance obligation profile is evolving.
- Treat the CEO and CCO separation decision as a milestone, not a crisis response: Firms that separate the CCO role proactively, calibrated to the AUM and complexity threshold that makes it financially practical, are making a governance decision. Firms that do so in response to an examination finding or compliance failure are managing a crisis.
- Connect governance structure to filing quality: The multi-hatted CCO firms in Convergence's database can be cross-referenced against ADV filing quality scores. Whether firms with combined CEO and CCO roles show higher error and omission rates than firms with dedicated CCOs is a question the data can answer and a risk signal worth surfacing for the compliance and allocator audiences.
What does Convergence's compliance complexity infrastructure measure beyond the multi-hatted CCO finding?
- Daily regime disclosure tracking: Convergence monitors changes to regulatory regime disclosures across the full adviser population daily, capturing additions, removals, and modifications as they appear in Form ADV filings.
- Regulatory, civil, and criminal violation tracking: Convergence tracks all regulatory, civil, and criminal violations reported by the SEC, providing a continuous view of the enforcement landscape that clients use to monitor their counterparty and client populations.
- Filing frequency and consistency monitoring: Beyond regime disclosures, Convergence tracks filing frequency and consistency across the full population, flagging advisers whose filing behavior deviates from peer baselines in ways that signal compliance stress.
- Non-investment risk profiling: The multi-hatted CCO finding is one component of Convergence's broader Non-Investment Risk Profile, which covers operational, compliance, service provider, and human capital risk across every adviser in the database.
- Integration with enforcement history: Convergence's HRBC methodology connects current compliance complexity indicators to a library of more than 400 SEC enforcement actions, allowing clients to assess whether a firm's current governance and filing behavior resembles the conditions that preceded enforcement events in comparable firms.