BOSTON – Imagine finishing your tax return this year, signing the paperwork and being ready to turn it in.
And then along comes another agency asking you to do it again, only this time basing it on a different 12-month period or under rules that are similar but different, or requiring you to hire yet another tax preparer to get the job done on time.
Now you have a picture of what securities firms face when it comes to compliance.
Loosely defined, compliance amounts to the regulatory hoops that investment companies must jump through in order to show regulators that everything is clean and above-board and problem-free.
Most investors would tell you that the more compliance you have and the more strict the regulations, the better. After all, you don't create a system that builds the confidence of the public by allowing these issues to be an afterthought.
But there's good compliance and there's redundant compliance, and the evolution of standards for securities firms has made it so that companies large and small are, effectively, having to file those multiple returns, each with its own little rules.
The problem is that the excessive compliance has a tangible cost, one that is paid by the ordinary investor. What's more, it also has a difficult psychological cost, namely the impression that compliance standards are so demanding now that regulators should stop short before adding any new and additional burdens. That may stunt the development of meaningful new disclosures in the future.
According to a new study released this week by the Securities Industry Association, securities firms spent more than $25 billion on compliance last year, up about 10 percent from 2004. Overall, firms in the securities industry are spending about 13 percent of revenues on compliance-related activities. Frank Fernandez, chief economist for the SIA, noted that many branch managers for securities firms now spend more than one-third of their time handling compliance stuff, compared to using less than 10 percent of their time on the same issues just a few years ago. More than 90 percent of the expenditures are simply to have the personnel needed to handle the compliance workload.
The SIA certainly has an interest in seeing less regulation and compliance, as reducing the paperwork and effort would have a direct benefit to member firms.
But investors also have an interest in seeing compliance and regulatory requirements that streamline the process, rather than bog it down. That branch manager who is up to his neck in paperwork isn't solving the problems of the customer who has issues with a broker or adviser, he's trying to cover the firm's rear end by staying on top of his largest single work task.
That's an unsatisfactory trade-off, kind of like what investors have come to expect from the regulatory community. Throughout the mutual fund rapid trading scandals of 2003-2004, regulators struck big-dollar settlement deals which sounded great, but which have yet to result in any substantive restitution to individual investors.
Tighter regulation and more disclosure and compliance gives investors the feeling that they are better off and safer, but that's only true when the each level of compliance adds to the others, rather than overlapping significantly so that specialists are buried in paperwork.
Fernandez noted that much of the increase in compliance costs results from "duplication of efforts. Respondents to the survey said they were asked for the same data, which varied only in time period. One would ask for the data, and then another would come in with the same request, just different enough so that the work had to be done twice with no significant difference in what was being reported."
The SIA's hope is that the various regulatory agencies, from the Securities and Exchange Commission to the state regulators to officials at the major stock and commodity exchanges, can somehow synchronize their requirements.
Part of the problem is that regulators aren't just protecting the turf of individual investors, they are protecting their own turf too. In recent years, there has been a struggle between the various regulators, each trying to keep what it has, and sometimes trying to gain ground on the others.
The sad thing is that regulation is not a competition. State securities administrators bolster the efforts of the SEC, acting as the local cop on the beat. Likewise, the regulatory arms of the various exchanges expand investor protection in other directions.
Investors should not want a pull-back on regulation for the savings it creates for the industry -- it's unlikely that most of the savings will come back to consumers -- but rather because reducing redundancy and streamlining the existing process will allow regulators to replace the overlap with even greater detail.
All of the plusses that were supposed to come from the Sarbanes-Oxley driven extension of compliance have been mostly a big yawn. Surveys show that investors hardly feel much better about the condition of the business today than a few years ago (although that may be nothing that a good, prolonged bull market couldn't cure).
As for the specifics of extending regulation, the first start could be actually have less to do with compliance than English. By eliminating overlap and requiring that compliance reports be written in a comprehensive, conversational tone, investors might feel they are truly benefiting, rather than merely hoping that more regulation means a better, cleaner securities business.
Copyright (c) 2006 MarketWatch, Inc.