A lot of broker-dealers prefer to have their CCO and FINOP in-house, where they can keep their pulses on business activity and compliance. However, it is often easy to overlook the Risks involved in taking that approach:
The Way It’s Always Been Done: A lot of In-House CCOs and FINOPs use their experience as their greatest tool. However, often times, what worked in 2007 doesn’t work in 2017. Regulators are sharper, and business is more complex. Do your firm’s supervisory controls align with the business that your firm conducts? How are other firms in your business segment identifying their risks and controls? If your CCO doesn’t work for any other BDs, how would he or she know? FINRA examines from a diverse knowledge base. Don’t you want the same?
Limited Dimensionality: A lot of In-House CCOs and FINOPs operate under the constraints of their one broker-dealer, with its fixed set of businesses, consistent personnel, and longstanding corporate goals. But there’s a huge market out there, filled with new ideas and strategies. Remote CCOs and FINOPs play in fluid waters, continuously exposed to varying regulatory conditions, and forced to stay literate in prevalent regulatory pronouncements. Remote Principals bring fresh perspective to business risks and opportunities.
The Fear of 2 Principals: A lot of BDs have several Compliance Principals and one FINOP. Why? Wouldn’t you want to have more than one person who can calculate net capital (which by the way, could be requested by a regulator at any time) or who can file the FOCUS reports? Smart broker-dealers have one FINOP available to review the work that the other FINOP prepares. It may be advisable to hire an Outsourced FINOP for the purposes of reviewing the financial statements and FOCUS reports.
Regulatory Exposure: It’s hard enough running a business in real-time for a BD to expect its compliance staff to precisely operate in accordance with FINRA/SEC regulations at all times. You need someone above the trees, to look at the trends, to envision the perspective that FINRA will bring. Just communicating with the regulators is an art in itself.
Enough about the Risks of Only Having an In-House CCO and FINOP.
What are the Benefits to the Remote CCO / FINOP Approach?:
The Flexibility to make changes that can enhance your business and protect it from regulatory damage.
The Multi-Dimensionality to stay updated with the regulations, and adapt your BD to its true risk environment.
The Addition of Remote Principals (both Compliance/CCO and Financial/FINOP) to bolster the knowledge base in your BD. Avoid mistakes, and identify solutions for business growth.
Reduce Regulatory Exposure with a Remote CCO who can interpret your BD’s risk profile within the context of other firms in your business sector, and with a Remote FINOP who reviews your BD’s financials under a lens sharpened by exposure to various other sets of financials in the industry.
Increase Efficiency by having an overall Compliance & Financial Risk Profile, that your employees can utilize to guide their tasks and objectives.
Reduce Overall Operating Costs by bringing on the Remote CCO and/or FINOP (on a monthly rate) versus full-time compliance and accounting staff.
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