More On Legal & Compliancefrom The Advisor's Professional Library
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
- How to Avoid Sabotaging Your Compliance Exam There is much more to compliance examination survival than knowing all of the rules. It helps to understand why the rules were put in placeand to recognize that examiners are not the enemy.
There are two excellent comments to my July 25 blog on AdvisorOne: The Penalty Box, and while they both take issue with what I wrote, I find myself in the surprising position of agreeing with each of them: They both correctly identify the real problem with SEC to be its focus on regulating compliance with the letter of its rules, rather than trying to catch the bad guys.
In the first, Mr. or Ms. Dissent wrote: “You are wrong. Until the SEC revises its priorities away from picayune tasks, more funding is unlikely to do much good.” Let me just say upfront, it’s hard for me to take issue with anyone who uses the word “picayune” in a comment. With that said, it’s also hard to disagree with the sentiment that the SEC appears to spend too much of its time on said “picayune” tasks. We’ve all heard (and many of you have experienced) the stories of SEC examiners who focus on extremely minor violations, and maybe even the odd savvy RIA who actually creates a minor omission or two just to make the examiners happy. I agree that more funding won’t solve the problem, but my only point is that this bureaucratic mentality isn’t likely to get better with stiffer penalties (as was my point in that July 25 blog), or less funding, for that matter.
Cindi wrote a more lengthy comment, in which she detailed some of the aforementioned “picayune tasks” such as “reams of paper detailing your policies and procedures for preventing problems” and “the search and punishment for poorly written policy when no wrongdoing is evident.” And then she summed up the problem nicely, using the SEC’s own description of its task: “In those meetings that the SEC conducted around the country for a few years, they stated over and over that it was not the ‘wrong-doing’ that they were searching for. Instead, it was how well written the polices and procedures were.”
Seems to me the SEC often does indeed fall into the pattern of government regulators everywhere: Avoiding the harder-to-catch serious violators, while justifying its existence by cracking down on minor violations by folks who are earnestly trying to comply. As we all are now very well aware, the SEC “investigated” Bernie Madoff some five separate times, finding his firm to be in compliance each time, while the examiners “found no evidence of fraud.”
The question is this: What can be done to deter the SEC from taking this bureaucratic path of least resistance and instead focus on preventing the bad guys from defrauding investors and/or catching them quickly before they can do more harm?
Cindi offers this solution: “Reams of paper do not deter crime. The likelihood of getting caught and punished is what deters crime. Maybe the SEC should simply reallocate resources to “detectives” skillful in investigation who can find evidence of wrongdoing…”
Cindi is undoubtedly right, as far as she goes. Yet while I don’t see that reducing the Commission’s funding is much of a solution, it’s also hard for me to see that “reallocating” its resources alone will go very far toward refocusing the SEC’s enforcement efforts. Perhaps a good first step would be to create a little more distance between the securities industry and its watchdog; rather than staffing the SEC from the top down, with folks from the broker/dealers’ hopelessly bureaucratic—and equally ineffectual—self-regulatory organization.