The Investment Compliance Agendas For 2011

Hiring more compliance faculty will be very common among the SEC, broker-dealers, hedge funds, RIA's, and the state's in twenty eleven and beyond. Some of these groups may take longer than others to get the staff but in general most of these groups will be expanding their compliance staff. In this post Madeoff and flash crash era, governance and expenses are only becoming larger. There are various reasons within each group for more compliance. In general the compliance is flourishing because of the ever-changing marketplace in finance and the end of the great hard times.

After a great recession money usually comes back into the markets in several innovative ways to be managed. This creates growth for existing broker-dealers and new entrepreneurial broker-dealers. We also are seeing many hedge funds from broker-dealers leaving and starting up their own hedge fund because of the conflicts of interest of the prop trading divisions within the broker-dealers. This is another avenue of growth and increased regulation because of their departure from the major banks. Some are even calling these new hedge funds too big to fail.

During the great slump many major banks went or almost went broke. This has led to more retail brokers departing the major established wire houses and creating their own RIA businesses. No longer was the term "Mother Merrill" a reasonable selling feature for the investment adviser to generate increased business. With technology and cost structures it is much easier for a financial adviser to start their own money management and asset gathering business on their own. All these ex-brokers are now Registered Investment Advisor's and regulated either by the Security Exchange Commission or the state. This is a huge influx for the law makers to oversee and handle but at the same time trying to keep investor confidence high.

After the flash crash, investor assurance in the market made an all-time low. To restore investor confidence various flash crash order reports on fills and cancels will be generated. These reports will be standard to all broker-dealers and might pass over to the funds. A centralized OATS reporting plan is supposed to be in place to determine who is creating a flash crash. A halt in the securities is also implemented to stop the fast action of a market crash. Law makers will also want this information at any time when there is an audit. The market structure of the markets will probably be changing because of the 30+ dark pools and fragmentation in the markets. We will probably see some type of central limit order book (CLOB) to defragment the market regardless of what market makers and order flow buyers think. It has been shown that the Canadian markets didn't crash as hard as the US did according to a Reuters article by Jonathan Spicer on Oct 12th. Toronto Stock exchange TMX Group Inc Chief Tomas Kloet said "The U.S.-based "flash crash" was less severe in neighboring Canada because of dedicated market makers, the depth of book protection for bids and offers, and the relatively high concentration of trading at the Toronto Stock Exchange".

As the economy gets better and better, development in the financial sector will increase. Money starts to arrive back into the new hedge funds, RIA, and markets. All of these areas will require more compliance and surveillance from the law makers. Some of these areas have already implemented some of the new regulations and others are set for the future. Overall, compliance will be an increase cost for many of these business segments. But it is required for growth in the financial industry and for investor morale.


Finando Compliancestan is an economic business writer hobbyist. The investment compliance industry is my specialty and favorite subject because it is perpetually changing. I also write about form ADV advantages today. Every day and week it is always changing with rumors, gossip, and buyouts. It is never a dull moment in the financial industry.