There has been some talk lately about a particular investment adviser legal proceeding called In the Matter of The Robare Group, LTD., Mark L. Robare, and Jack L. Jones, Jr. Law firms have promoted this case to argue their point that firms should only hire licensed legal counsel to assist with compliance matters or at the very least, hire a compliance consultant via counsel to protect “the reliance on counsel” defense for enforcement actions.
The central issue for law firms in the Robare case was the SEC’s denial of the “reliance on compliance consultant defense.” There already exists an accepted defense of “reliance on counsel.” In this case, the SEC found that neither Robare nor the various compliance consultants that testified could prove the equivalent of the “reliance on counsel” defense standards, which include defendant (1) must demonstrate “that he made complete disclosure to counsel, (2) sought advice as to the legality of his conduct, (3) received advice that his conduct was legal, and (4) relied on that advice in good faith.” Since Robare and the compliance consultants could provide no evidence regarding any discussions between them on the matter at hand, they could not meet these standards.
We would argue that had Robare and the compliance consultants provided the required evidence that met the above four standards of the accepted “reliance on counsel” defense, then the SEC would likely have accepted a “reliance on compliance consultant” defense as well. The lesson to be learned from this case is that firms must document their interaction with compliance consultants and vice versa. Further, compliance consultants need to be aware of this standard and keep it in mind whenever they are dealing in delicate or “grey areas” that could lead to possible enforcement actions.
Robare is an interesting case as it’s the first time that the issue of “reliance on compliance consultant” defense has even come into question. It sets the stage for this defense to be seen again in future cases now that there is some guidance on what the exact expectations are for a successful defense. As the use of compliance consultants increases this will become very important for firms facing enforcement actions.
Currently, the use of compliance consultants is a grey area when it comes to legal matters. Because of the short history and youth of the compliance consulting industry there are a very few legal cases that involve compliance consultants. But, Robare reveals that compliance consulting is firmly planted in the industry as a recognized support service. While the industry has only taken hold in the last ten years, it has experienced predominant growth since the inception of Dodd-Frank.
The use of outside compliance consultants can save a firm tens of thousands of dollars compared to using a law firm for the same work. Most compliance consultants charge fees using a fixed cost structure while law firms almost exclusively rely on an hourly rate approach considered by many to generate higher costs for less value. One firm ended up paying outside counsel $165,000 more than a compliance consultant’s fee for the exact same services. Also, a seasoned compliance consultant with good in-house operational experience can provide a practical approach to implementation work that a law firm cannot. For these reasons, there has been a growing trend by investment firms the last several years to instead rely on compliance consultants for compliance related work as opposed to outside counsel. Law firms are steadily losing this business and it’s clearly affecting their bottom line at a time when the law firm model is struggling to survive in a saturated industry.
FrontLine has found that some attorneys recognize the usefulness of compliance consultants, but many won’t admit it. Many simply see them as competitors and inept competitors at best. We understand that perspective as there are those that call themselves compliance consultants and yet they have very little experience in compliance or, more often, may have a great deal of experience in one area of compliance, but don’t have enough of an overall background to hold themselves out as compliance experts. This is a product of two things, (1) there are currently no standards for compliance consultants operating in the US (no Bar Association type entity that puts requirements on practitioners) and (2) the broker-dealer industry is shrinking while the RIA industry is growing- fast, and yet there are many more broker-dealer compliance professionals than there are RIA compliance professionals. This has pushed more broker-dealer compliance professionals into RIA work without the necessary experience to succeed. It’s a supply-demand conundrum.
For the past 11 years, we have seen how this supply-demand imbalance has played out. Registered advisory firms struggle to find experienced compliance professionals that have a true grasp of the Advisers Act or the Investment Company Act. Because of this, they are forced to hire less experienced staff or hire seasoned broker-dealer compliance professionals, which are more available. Unfortunately, often business-line managers that make the hiring decisions do not recognize the fact that a 25-year veteran of broker-dealer (only) compliance will not be a good fit for an investment adviser program. Executive level decision-makers tend to lump “compliance” into one category and don’t realize the vast difference in regulations and skill sets.
Compliance consultants can make the same mistake by taking on work in which they lack the bench strength to handle. For example, a consultancy that primarily performs outsourced FINOP work for broker-dealers should not be hawking its services to advisory firms looking for SEC registration and compliance policies under the ‘40 Acts.
SEC/FINRA/NFA Regulatory compliance consulting is a new industry that will take another ten years, at least, to evolve. So, for now, the industry should select consultants wisely by creating standardized vetting procedures that make the selection process equal for all compliance consultants solicited. Now is the time for the compliance consulting industry to raise its game and earn a widely-held recognition of its value.
