More On Legal & Compliancefrom The Advisor's Professional Library
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
Securities and Exchange Commission Chairwoman Mary Jo White assured compliance officers Tuesday that if they act “within the law” they should not fear enforcement action.
“Although we occasionally bring enforcement actions against compliance personnel, compliance officers who perform their responsibilities diligently, in good faith, and in compliance with the law are our partners and need not fear enforcement action,” White told compliance officers at the National Society of Compliance Professionals annual meeting in Washington.
Said White: "We have a great deal of respect for you and are far more interested in helping you succeed before an examination than we are in catching your firm in a violation in the course of an examination."
John 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 — and is now a partner in the securities practice at the law firm Sutherland Asbill & Brennan LLP, noted at the event that White's comments show that there is "a real effort that [the agency] is not trying to single out compliance" for enforcement actions. "That’s good. I’m glad to hear that," Walsh said. "But the proof is going to be in the cases they bring."
Walsh, who warned White in June to stop suing compliance officers “or the future of the profession may be at risk,” told ThinkAdvisor that the SEC's compliance sweep and some previous cases that the agency brought had compliance professionals worried that they were being "targeted" by the agency. "There was enough to make people nervous," Walsh said, but compliance pros at the conference "were very pleased with what [White] had to say."
Walsh said during a lunch session with Lee Augsburger, senior vice president and chief compliance officer at Prudential Financial, that compliance officers grapple with knowing when “enough is enough” in terms of having an adequate compliance program.
“It depends,” replied Augsburger. “I sleep like a baby at night; I wake up every half hour crying,” he said half in jest. Compliance officers must identify the scope of their responsibilities, he advised, and determine the firm’s “risk assessment” plan. “If you have a solid risk assessment and you follow it then you have the answers for any regulator.”
Walsh agreed: “If you have a thoughtful process and clear risk assessment you can get a good night’s sleep.”
White told compliance professionals that they are “on the front lines working day in and day out in an effort to prevent people from cutting corners,” and are “a critical line of defense against violations of the securities laws and regulations.”
Compliance professionals’ work “is extremely important to [the SEC] as well as to investors because you are positioned to prevent infractions from happening in the first place, rather than coming to our attention only after harm has been done.”
Said White: “As much as [the SEC] strives to be everywhere we can be, our resources are limited and always stretched.”
She noted that the agency has 450 examiners who must inspect nearly 11,000 advisors, who advise approximately 9,700 mutual funds and ETFs and 30,000 private funds. “That is a 24-to-1 ratio of examiners to registrants and a nearly 90-to-1 ratio of examiners to funds – far larger than that of almost every other financial regulatory agency,” White said.
She also highlighted the agency's broker-dealer exam team’s priorities: potential violations of the market access rule and unsuitable sales of high-yield securities. The investment advisor exam team, she said, is now focused catching potential conflicts of interest of investment advisors in allocating trades among their client accounts.
White also noted the success of the agency’s multipronged Compliance Program Initiative, launched in 2011, which is cracking down on advisors who’ve failed to implement adequate compliance programs. The Enforcement Division’s Asset Management Unit, examination staff and Investment Management Division are “teaming up to identify and recommend enforcement actions against registered advisors who have failed to adopt or implement an adequate compliance program after being notified repeatedly of deficiencies by our staff,” White said.
To date, the commission has brought six settled actions as part of this initiative, and more are in the pipeline, she said. In one of these cases filed in 2012, the SEC charged an RIA who had gone five years without addressing the compliance deficiencies that the agency identified in a 2005 exam. “Those deficiencies included inadequately tailoring its compliance manual to its business as well as making inaccurate or inconsistent statements in its filings,” White said.
When the SEC conducted a subsequent exam, White continued, “our examiners not only found that the deficiencies identified earlier were not remedied, but also that the firm had failed to enforce its written code of ethics and neglected for several years to conduct the required annual review of its compliance program.”
The case involved charges against the firm and not the compliance officer.
The agency is also using risk alerts and publicizing its priorities and exam observations to empower compliance officials, White said. “Recognizing that you – like we – do not have infinite resources, we now highlight practices, policies and procedures that show or suggest a pattern of noncompliance throughout the industry."
She noted the recent risk alert on Rule 105 of Regulation M, a rule that generally bans firms from improperly participating in public offerings soon after short selling those same stocks.
“It is a very important rule but, as our exams discovered, a rule often not observed,” she said. SEC exams and enforcement investigations revealed that a “surprisingly large number of investment advisors and broker-dealers have either ignored or overlooked the rule in designing and implementing their policies and procedures.”
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