More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- 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.
Former Securities and Exchange Commission Compliance Chief John Walsh recently offered new SEC Chairwoman Mary Jo White some blunt advice: stop suing compliance officers “or the future of the profession may be at risk”; don’t set enforcement records; and “separate examinations and enforcement” so that legal and compliance professionals know with whom they are dealing.
In a June 7 blog post on Corporate Counsel, Walsh, who held various posts during his two decades at the SEC—most notably as chief counsel for the SEC’s Office of Compliance, Inspections and Examinations—told White that after a couple months with the commission, “you may be wondering why you agreed to serve.” He then told White: “Trust me: after your first few months in office, it gets worse.”
But Walsh—who lived through the Bernie Madoff days at the SEC, and was one of the SEC officials to testify before Congress about why the agency missed his Ponzi scheme for so long—encouraged White “to take the commission in a new direction,” and offered her some advice to consider on her journey.
First, Walsh told White that compliance professionals are “dedicated to the same mission as the SEC: a fully compliant securities business,” yet, in recent years, many of them believe “they have been under assault,” because the SEC seems to have “developed an appetite for suing them” for failures to supervise, to establish adequate procedures, to consider a risk during the annual compliance review.
Walsh, who's now a partner at the law firm Sutherland in Washington, told White that he understands why compliance pros are worried: “In many of these cases there was no suggestion that the compliance professional engaged in misconduct," he said. "The liability was collateral and the conduct negligent, at worst.”
When the SEC brings an enforcement recommendation against a compliance professional, Walsh counseled White to first ask: “’Did he or she engage in affirmative misconduct?’” If the answer is no, he said, “then you should ask, ‘What’s wrong with an examination letter?’”
Last March, Robert Plaze, the former deputy director of the SEC's Division of Investment Management, warned chief compliance officers that the newly created Asset Management Unit that’s housed within the SEC’s Division of Enforcement “is dedicated to suing you.”
If the current trend of jumping to sue compliance pros continues, Walsh added, and they “become regulatory guarantors of their firms, the future of the profession may be at risk.”
Second, the agency should separate its examinations and enforcement so that legal and compliance professionals “will know with whom they are dealing,” Walsh said. While in recent years the agency has been publicly promoting the fact that its enforcement and exam divisions having “locked arms” to coordinate before, during and after exams, this has caused the differences between exams and enforcement to “steadily disappear.”
Walsh’s final piece of advice to White was not to set enforcement records. Federal agencies, he said, “should not set records—the most, the biggest, the fastest—in their regulatory activities” because as soon as the agency does, “your motives will be suspect.”
The number of cases “will be described as ‘running up the numbers,’” he continued, which is “certain to trigger alternative analyses that question your claim.”
For instance, Walsh points to the SEC’s recent claim to have brought a record number of enforcement actions in a single fiscal year. “That record, with its attendant publicity, should be allowed to expire,” he said. “Whatever the record’s short-term value—it may have been worth it as a one-time claim—sustaining the effort is certain to cost more than it is worth.”
Setting records with penalties is just as bad, Walsh asserts. While the “power to impose penalities is relatively new” to the agency, he says, they have quickly increased until they now dwarf anything imagined.” Commentators “dismiss them as ‘chump change’ or a ‘slap on the wrist.’”
The lesson, says Walsh: “No penalty will ever be high enough to validate your program.”
Check out SEC, Industry Experts Issue Stern Warning to CCOs on AdvisorOne.