Some dealers have decided to slim down their compliance departments in an effort to cut costs during the recession. But this is a dangerous move, industry experts say, as companies could be leaving themselves vulnerable to increased client scrutiny and violations.

Of the 150 members of the Toronto-based Asso-ciation of Canadian Compliance Profes-sionals 29% have reported downsizing in their compliance departments, says ACCP chairwoman Kim Maggiacomo. Although the downsizing in compliance cannot be classified as “massive,” the trend is there.

“Obviously, with fewer trades, layoffs in trade compliance make sense,” Maggiacomo says. “But when markets go down, what happens is that clients complain. That’s a whole other aspect of compliance that people are just going to get buried in.”

However, staffing cuts in a compliance department don’t necessarily hinder its ability to meet regulatory obligations, argues Frank Hurst, chief compliance officer of Toronto-based Assante Financial Management Ltd., a subsidiary of Toronto-based Assante Wealth Management (Canada) Ltd. The former let go three compliance officers out of a 60-person department this past autumn.

“If you have somebody in trade surveillance, and he or she is capable of looking at 200 trades a day, and the volume drops to 100 trades day, you can then have one person doing the work of two people,” Hurst says. “We certainly have enough staff to meet our regulatory requirements.”

And that is what the Ontario Securities Commission cares about: compliance departments that are “adequately funded and staffed,” Marianne Bridge, manager of compliance at the OSC, said in a letter that was sent to 864 recipients on March 23.

In the letter, Bridge specifies four actions that dealers need to take to ensure they are being extra vigilant and proactive toward compliance during these market conditions. These include: frequent client communication; updating the know-your-client information; ensuring that registrants know the products they are selling; and that hard-to-value investments are valued properly.

“It’s a reminder of a firm’s existing obligations,” Bridge says. “Obviously, we’ve seen a lot of layoffs across the financial services industry because of current market conditions. We wanted to make sure we got a message out about our ongoing expectations.”

The OSC’s letter mirrors similar actions taken by the U.S. Securities and Exchange Commission on Nov. 13, 2008, when Christopher Cox, then chairman of the SEC, spoke on the matter. “When a company cuts compliance, violations will occur,” Cox said in his speech. “This is true [now] more than ever; there will be no favour granted because a company made a cost-cutting decision to minimize its compliance budget. Compliance programs have made huge strides in recent years in becoming more formalized and robust. We must not turn back the clock.”

Despite taking some heat on its subsidiary’s layoffs, Assante has sent a letter to the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada, proposing to merge the compliance departments of three of its dealerships — Assante Financial, Blackmont Capital Inc. and Stonegate Private Counsel LP — says Joe Canavan, Assante’s chairman and CEO.

No further downsizing in compliance will occur because of the merger. “This isn’t a cost-cutting exercise,” Canavan says. “It’s about running our organizations more efficiently and effectively.”

The merger would minimize the duplication of efforts during audits.

As for companies in the U.S., they have been downsizing their regulatory departments substantially, despite Cox’s warning, says Simon Lewis, managing director of banking and financial services with Weybridge, Britain-based Michael Page International PLC’s New York office: “There have been some layoffs in compliance in some of the bigger banks.”

The trend now is to hire one compliance person who can do it all, says Analesey Vaughan, a compliance recruiter with Michael Page’s New York office. “I’ve seen a lot of positions in which companies have let go two or three [junior] people and tried to cover that through a one [senior] person,” she says. “The junior people who have been laid off are the anti-money laundering types. The market is being more generalist. So, you’re seeing a lot more core regulatory officers being recruited.”

Generalized compliance officers are more likely to have had their training at a regulatory body and are still very much in demand, Vaughan says. Often, rookie officers, such as accountants or lawyers who were trained at regulators to become examiners, become hot candidates as they know what regulators look for, she adds.

@page_break@The same is true for ACCP members; 28% of the 150 say their firms are still hiring, Maggiacomo says. The remaining 43% say there has been no change at all in their compliance departments since the downturn began.

“It’s shortsighted to downsize your compliance department without making sure you have upgraded the skills of the people who are there,” says Glorianne Stromberg, a securities lawyer and a former commissioner with the OSC. Although most firms simply regard the compliance department as an expense, she adds, “it really is a firm’s form of quality control.” IE