The following article was written by Mr. Kuni Chen, CFA, a former sell-side equity research analyst and the Director of Research Advisory Practice at Compliance Risk Concepts.
Today, many nonregistered firms need their research to be FINRA compliant based on the demands of buyside clients. These requirements are due, in large part, to the insider trading scandals which started a decade or so ago, which prompted a growing number of hedge funds to require that all of their external research providers, including independent research firms, implement similar safeguards that sell-side firms are required to adopt. This includes creating and implementing extensive compliance policies and procedures, and hiring supervisory analysts to review a firm’s research. Unfortunately, the cost of adopting these controls can be extremely high.
During 2020, outsourcing for compliance and supervisory analyst services has accelerated as both large and small firms shift to variable cost models. But picking the right outsourced compliance partner can directly impact an independent research provider’s relationship with its clients.
First, an outsourced compliance partner should have deep experience in research compliance. This can be verified by checking resumes and asking if there is in-house experience with research compliance. Second, an outsourced compliance partner should understand buyside customer expectations and demands, not just regulatory requirements. Key issues include protocols to protect confidentiality and avoid exposure to material non-public information. Third, an outsourced partner should be fully versed in both buyside and sell-side regulatory compliance issues. For instance, the growth of issuer-paid research has led to evolving best practices around conflict mitigation and disclosure requirements.
One of the leading providers in the growing field of outsourced compliance services is NY-based Compliance Risk Concepts (CRC). “Throughout the Covid-19 pandemic, CRC has recognized an increase in demand for our services based on our clients’ appetite to leverage our plug and play ‘Compliance-as-a-Service’ model. Our clients appreciate CRC’s variable cost model, which offers flexibility to scale up or scale down services as business requirements necessitate,” said Mitch Avnet, Managing Partner and CEO.
In addition to compliance, the supervisory analyst role is moving from in-house to an outsourced SA model. Piecemeal billing allows an outsourced SA to work with several research boutiques while only charging for actual time spent approving reports. For example, a quarterly update note may be about 15-20 minutes of billable time. This allows the research firm to avoid fixed costs with SA salaries and benefits.
“The Covid crisis has not affected our business as research analysts can work from anywhere; in fact, our volume was up last year,” said Kuni Chen, Director of CRC’s Research Advisory Practice.
Some of the impacts of Covid and work-from-home are likely to lead to permanent changes across Wall Street. As such, more firms are adopting variable cost structures where possible. These changes can be seen through the rapid growth of outsourced compliance and supervisory analyst roles throughout 2020 and into 2021.
Please contact Mr. Kuni Chen with any questions.
Cell: 646-483-8749
Email: kchen@compliance-risk.com