Compliance group tries to bridge SEC/industry knowledge gap

NSCP bucks tradition with 10-session curriculum designed to train regulators on industry realities

An association for compliance managers is taking an unusually direct approach to bridge the gap between the investment industry and regulators that has grown wider as the SEC’s regulatory agenda has become more ambitious.

The National Society of Compliance Professionals (NSCP) has expanded the curriculum of the NSCP National Conference, to be held in Dallas Oct. 16-18, with a separate agenda of sessions aimed at regulators who want to know more about how asset managers operate and the scale of the changes they have to make to comply with regulatory changes.

The addition is a major change in policy for NSCP, which usually bars regulators – even the long list of senior-level regulatory officials invited to speak at the event – from attending any but the most open conference sessions.

Limiting attendance in educational sessions to the financial-services-industry compliance professionals who make up NSCP’s core membership encourages attendees to share potentially sensitive information more openly than they could with regulators in the room, according to NSCP CEO and executive director Lisa Crossley.

The idea is to connect the knowledge of compliance professionals struggling to manage a stressful regulatory environment to the mid- and upper-level regulators who do most of the heavy work required to apply abstruse regulations to the real world but who often have little practical experience that would help them understand how those companies work.

“In speaking with former regulators, we asked what the one thing was that they could have used while working at the SEC, and almost all said they would have liked more practical education on how the industry implements those rules, what worked and what didn’t,” Crossley said.

“While we were talking to some of the people we invited to speak at the conference, we told them we saw an opportunity here and asked if the SEC would be willing to let their employees attend the conference.”

The idea fit with suggestions from commissioners Hester Peirce and Mark Uyeda and other SEC officials who urged the agency to find ways to get practical feedback from portfolio managers and others in the industry. The idea has become far more popular since the October 2022 SEC Inspector General’s report warning that the intense regulatory agenda initiated by SEC Chair Gary Gensler had left SEC staff wondering if they would be able to keep up, and reports that a wave of resignations had left the SEC short of experienced senior-level staff, especially those with decades of knowledge about how the industry reacts to new regulation.

“This invitation is not just about regulators gaining knowledge,” Crossley wrote in an explanation posted on LinkedIn. “Effective regulation requires open lines of communication and a shared understanding of the challenges faced by both regulators and compliance professionals. By bringing everyone together, we can bridge the gap and foster constructive dialogue that leads to better outcomes for all.”

SEC/industry knowledge gap

The need to introduce regulators and industry figures might have been unnecessary during periods when it was routine for mid- and senior-level SEC staffers to interact frequently and often informally with counterparts at regulated companies.

Those nuts-and-bolts questions about how the SEC is likely to apply a rule to a new product or how a service might have to be changed to make it compliant, have become far less common, far less informative and far more adversarial since Gensler’s confirmation in April 2021, according to trustees, former top-level SEC officials, and attorneys advising fund boards.

“It was a good way to confirm whether or not you were stepping over a line,” according to one fund-board lawyer who asked not to be identified.

It was also a good way for SEC staffers to keep tabs on the trends in the development of new products or services, problems registered companies might be having with compliance, and potential enforcement problems with third parties an investment company might encounter sooner than SEC staff, one former [BS1] SEC official said.

The SEC has lost many of its most experienced people to law firms paying high salaries for regulatory expertise during the past two years, but it has also lost a lot of industry knowledge by focusing on mid- and senior-level staff with academic or regulatory experience but not much understanding of the industry, many said.

The current director of the Division of Investment Management and both the current and former directors of the Division of Corporation Finance were law-school professors with little law-firm experience, for example. Gurbir Grewal, director of the Division of Enforcement, is praised for his judgment and legal skills, but had little access to direct industry experience after serving as a Bergen County (N.J.) prosecutor and, later as attorney general of the State of New Jersey before joining the SEC. “You’re dealing with a lot of people with no boots-on-the-ground experience and, under Gensler, even the willingness to talk to people in the industry is much less than a few years ago,” according to one compliance executive with experience working with fund boards. “If you ask what a regulation means, you hear, ‘Read the text; the rule is the rule.’ Ask about a new proposal and I’ve heard more than once, ‘I can’t talk to you about that,’ which you could understand, but isn’t very helpful.”

NSCP National Conference Sessions for Regulators

• Cybersecurity – Evolving and Toughening Regulatory Standards and Expectations
• Best Practices for Supervision & Compliance of Off-Channel Communications
• Recommending Alternative or Complex Products
• Kicking the Tires: Why Service Provider Due Diligence Matters
• SEC & FINRA Enforcement Issues and Trends
• Best Practices for an Effective Global Compliance Program
• Supervision in the New Hybrid Workforce Office World
• Evolving Custody Responsibilities
• ESG, Its Role in the Firm, and the Role of Compliance (Intermediate)
• FinTech and RegTech: Current Developments
• SEC Enforcement Issues