More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
Congress wasted little time in taking SEC officials to task after the securities watchdog's inspector general released September 2 a scathing report on the SEC's failure to detect the Bernie Madoff Ponzi scheme.
At a September 10 hearing held by the Senate Banking, Housing, and Urban Affairs Committee, Chairman Christopher Dodd (D-Connecticut) stated that he was still trying to fathom "what went on" at the SEC to allow Madoff's "colossal thievery." Senator Richard Shelby (R-Alabama), ranking member on the committee, said that the IG's report shows that "fixing the SEC will not require just more resources," but rather that the SEC "must revamp the way it works," Shelby said. If the SEC "refuses to do so," he said, "Congress will do it for them."
Meanwhile, the SEC announced September 16 that it had named Henry Hu, a University of Texas law school professor, as director of a new Division of Risk, Strategy, and Financial Innovation, combining the offices of Economic Analysis and Risk Assessment with other functions.
Senator Chuck Schumer (D-New York) stated during the hearing that the SEC is in dire need of more funds if it is to retain competent staff and hire talented new employees, so he's crafting a bill to ensure the SEC can become self-funded. This would allow the Commission to put the various fees it collects right back into the agency, instead of having to "go begging to Congress every year for appropriations," Schumer said. Members of the committee again faulted the SEC for having a lawyer-heavy employee base, and urged the SEC to hire more individuals with investment savvy.
SEC Inspector General David Kotz testified that there were a series of blunders and missed opportunities by inexperienced SEC staff who were charged with examining Bernie Madoff and his company, and that those examiners were not properly supervised by senior SEC staff. Kotz wrote in the report's executive summary that the SEC received "more than ample information in the form of detailed and substantive complaints over the years to warrant a thorough and comprehensive examination and/or investigation" of Madoff and his company for operating a Ponzi scheme. While Kotz said he found no evidence of fraud among the SEC employees who conducted the Madoff exams, despite "three examinations and two investigations" of the firm, his report concludes that "a thorough and competent investigation or examination was never performed."
Both Robert Khuzami, director of the SEC's enforcement division, and John Walsh, the acting director of the SEC's Office of Compliance, Inspections, and Examinations (OCIE), told Congress they sincerely regretted the SEC's failure to catch Madoff, adding that they are working hard to revamp the way the SEC operates. When asked by Schumer how Madoff's Ponzi scheme went undetected, Walsh said that there were two primary causes: the examiners failed to obtain third party verification of information that Madoff was giving them, particularly as to his trading volume. "We now require third-party verification," Walsh said. And second, the exams were too targeted on certain technical issues. Kotz concurred that the SEC exams are "checklist" oriented and often fail to take a more holistic look at firms.