More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
Linda Chatman Thomsen, the director of the SEC's Division of Enforcement, said February 9 that she would leave the Commission and return to the private sector. In the release announcing her resignation, the Commission boasted that during her tenure it had "brought the second- and third-highest number of enforcement actions in agency history," but many think that her legacy will be tarnished by the Commission's failure to detect the Madoff Ponzi scheme.
Former SEC Chairman Harvey Pitt said in an e-mail that he believes the current examination process is "structured in a way to doom the SEC to failure," noting that "there are simply too many regulated entities for the SEC ever to do the kind of job we expect in the compliance area."
It's more than just the structure, argues Pitt, it's also the people. In his Congressional testimony on the Madoff case, whistleblower Harry Markopolos warned incoming Chairman Mary Schapiro that she "will find that she has too many attorneys and too few professionals with any sort of financial background."
Pitt argues for the concept of a "new examination paradigm" under which "every regulated entity would be examined, either annually (larger firms) or biennially (smaller firms)." Those examinations, he says, would be conducted by firms "completely independent of the entities they examine . . . and the examinations would cover whatever areas the SEC believes should be covered. At the end of the examination, there would be a report filed that would be given both to the regulated entity's board as well as to the SEC."
This approach, Pitt argues, "would enable the SEC to detect changing trends and industry problems, and make use of sophisticated personnel to conduct examinations."
Pitt still believes in the Commission. "There is a real need for the SEC and the functions it performs," he says, and he believes "it will rebound from the current difficulties and adverse perceptions" it has suffered recently.--James J. Green and Melanie Waddell