Enhanced regulation of private funds is fueling competition for compliance professionals. In the latest edition of our webcast, MBK Talks, marketing director Michael Oliver interviewed MBK Search’s chief executive officer Spencer Knibbe, to find out how firms should prepare for the new regime.
Private equity firms, hedge fund houses and other private markets managers are facing sweeping rule changes from the Securities and Exchange Commission (SEC). Regular disclosures will be required on fees, expenses and performance, while firms will be barred from agreeing preferential treatment for selected clients.
The rule changes are being contested in the courts, but no one expects the regulator to back off. MBK Search is already seeing an increase in demand for compliance professionals, but not everyone is at the same level of acceptance or preparation.
The stages of readiness are similar to those for previous changes to rules and regulations. The largest and most sophisticated firms are well advanced, often building on an established compliance department. But there are others who are less well prepared and some even refusing to recognize reality.
“There are firms looking at it as a kind of ‘wait and see’ issue. They try to justify to themselves that they don’t have to do anything yet and are waiting to see what everybody else in the industry is doing,” said Knibbe.
But, he added, reality will eventually bite. “There will be a point when the regulation gains teeth, when notices, fines or adverse actions start to come down. Then some firms will go: ‘Oh crap! We’ve really gotta move — they’re serious this time!’”
The firms facing the biggest challenge are smaller firms, typically with assets under management (AUM) of $5 billion or less. It is among these firms, Knibbe said, that he expected to see the biggest push to recruit governance, risk and compliance (GRC) talent.
For many firms, the rule changes will require a big step up in how they resource compliance. In some cases, the role of compliance has been combined with another job function — for example, a chief operating officer will also act as chief compliance officer. In others, compliance functions may be carried out as part of portfolio management rather than at the firm or group level. Complying with the SEC rules changes will require such firms to split roles to create dedicated compliance chiefs or even create new compliance functions from scratch.
Candidates in demand … and more demanding
The challenge these firms face is twofold — a market supply and demand mismatch and the resulting financial demands of candidates. Even during difficult times and amid head count reductions in financial services, demand for compliance professionals is usually robust, said Knibbe. But, as a slew of smaller firms start to pursue talent to meet their new regulatory obligations, the balance will tip even further in favor of candidates.
“Compliance officers’ compensation levels are competitive and rightly so, because this type of talent is absolutely in demand. So smaller firms will have to pony up some money to get the right people in place. They’re going to have to compete with a whole bunch of other private fund managers who are looking for the same thing,” said Knibbe.
But it’s not just about money — career and opportunity will also be crucial to attracting the right GRC candidates. Most experienced and skilled compliance professionals have had careers at large firms. To attract these candidates, smaller firms will need to offer more than a pay check, Knibbe warned.
“You need to be able to make a sales pitch to those individuals [to demonstrate] that this is a good career move for them, and that they can actually effect change versus just being a box ticker or an internal police officer,” he said. On top of this, he added, many candidates have expectations of hybrid or full remote working.
Flexible hiring solutions
For firms, a degree of flexible thinking may also be essential in implementing change or enhancement to compliance. Establishing systems, processes and teams may require considerable upfront resources, but these will then be scaled back once those systems are in place. Firms may also wish to take a staged approach, establishing a compliance resource initially by using third-party advisers or temporary expertise before later setting up a permanently staffed in-house function.
Part-time, interim and contractor recruitment are all possible solutions and MBK Search has helped firms with all these combinations of talent resourcing, Knibbe said. At the same time, there are an increasing number of GRC professionals who are keen to operate with greater independence, either as freelancers or on month-to-month contracts.
Building compliance for the future
Adjusting to the changes and deciding on the right approach to recruiting GRC professionals can appear daunting, but according to Knibbe there are three essential steps to simplifying the process.
The first is assessing what the new regulations mean for your firm and what new skills are required to build your solution. The second is the sustainability of day-to-day operations, which may involve a different set of skills and resources to the building phase. Thirdly, the compliance solution must be able to grow with the business.
“Look to the future,” said Knibbe. “Is this something that can scale to meet your firm’s growth? Are you going to double your assets under management or look for international expansion?”
To many firms, the SEC regulation changes will appear to be an unwelcome burden. But hoping they will go away is not a realistic option. Addressing the need for talent to both cope with the transition and the ongoing obligations is essential, not just to meet the regulators’ demands but also to be ready for future growth.
Watch the full webinar below: