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Regulation and Compliance > Federal Regulation > SEC

SEC Exam Chief Warns: Don't Skimp on Compliance

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The Securities and Exchange Commission’s exam chief is warning advisors to not scrimp on their compliance programs and advising them to elevate the chief compliance officer’s role at their firms.

In a recent speech, Pete Driscoll, director of the securities regulator’s Office of Compliance Inspections and Examinations, stated that he views compliance officers as “partners;” he highlighted the importance that compliance programs and compliance officers “play in ensuring that market participants and firms protect investors.”

“We cannot underscore enough a firm’s continued need to assess whether its compliance program has adequate resources to support its compliance function,” Driscoll said.

Compliance officers “are on the front lines of ensuring registrants meet their obligations under applicable securities laws and regulations.”

He noted that advisory firm CCOs’ fear that they “bear the ultimate responsibility for the success or failures” of any compliance program are not warranted.

“A CCO, while a critical component to the effectiveness of any compliance program, is just that, one component,” explained Driscoll. “As the Advisers Act Compliance Rule states, a CCO is responsible for ‘administering’ the compliance policies and procedures that the adviser, not just the CCO, adopts.”

Consequently, he added, “I believe that compliance obligations and opportunities lie with personnel firm-wide, including importantly senior management and ownership, the tone from the top, and the first line or business side of an enterprise.”

That is not to say, though, “that OCIE does not have high, perhaps very high expectations for CCOs,” according to Driscoll. OCIE exams, he continued, have shown there are “competent CCOs that are not empowered to live up to the role that the Commission described in the adopting release of the compliance rule,” because they lack “the full authority to develop and enforce policies and procedures and be of sufficient seniority and authority” within the firm.

“Without a solid compliance culture, supported by a sincere ‘tone at the top’ by senior management, a firm stands to lose the hard earned trust of its clients, investors, customers and other key stakeholders,” Driscoll warned.

FINRA’s Cook on Reg BI As the SEC works toward finalizing its Regulation Best Interest proposal for brokers, two issues are front and center for the Financial Industry Regulatory Authority: how to implement the new rule and potential changes to the broker-dealer self-regulator’s own rules, FINRA CEO Robert Cook said in mid-May.

“Wherever the SEC lands, it may have implications for our rulebook,” Cook said during a question and answer session at the Institute for Portfolio Alternatives’ annual conference in Washington. “Let’s say that [the SEC] standard incorporates the [FINRA] suitability standard within it; then it seems like it might make sense for us to look at our suitability rule.”

FINRA also is “thinking more generally about … aspects of our rules that might need to be adjusted/aligned with where the SEC lands,” Cook said. “It’s not surprising, because most of the sales practice requirements historically have come from the FINRA rulebook. Reg BI is sort of federalizing sales practice issues.”

Philosophically, Cook added, “it doesn’t make sense that you would have rules where there’s a risk of inconsistency in approach.”

In separate comments to ThinkAdvisor after his remarks, Cook said that as it stands now “Reg BI incorporates the suitability rule, but adds to it; there are other requirements there that are more explicit with additional requirements.”

There’s a “suitability element to Reg BI, and that’s when we’re talking about looking at alignment with our rulebook; if they [the SEC] have covered 100% of our suitability rule” in the final version of Reg BI, “then we might look at whether we need our suitability rule or do we need it in all circumstances,” Cook said.

Because FINRA is “the front line examiner” of broker-dealers, the regulator will need to “make sure that our examiners are well-trained and understand the requirements of the rule design,” he explained during his Q&A remarks.

Unlike other SEC rules that FINRA examiners must interpret, Reg BI “is going to be in the order of magnitude that’s going to be quite different,” than other SEC rules, Cook added.

“We’re going to have to work closely with the SEC to make sure we’re examining it as intended for.”

Reg BI compliance is “going to be a management issue for us — how we make sure that our examiners are well-trained and understand the requirements of the rule design,” he said. Cook also explained that he anticipates using the Reg BI implementation period as set out by the SEC “to see if we can achieve alignment, if necessary.”

SEC Chair Clayton on Tackling Reg BI In crafting standards of conduct rules for brokers and advisors, preserving investors’ choice and lowering their costs are SEC Chairman Jay Clayton’s paramount concerns, he reiterated in early May.

“What is clear is that one form of relationship is probably not optimal for investors,” Clayton said during a Q&A session with Investment Company Institute President and CEO Paul Schott Stevens at ICI’s yearly membership meeting in Washington.

“There are some investors who are very much benefited by a commission model; they will pay less for the same or better service than those who have the typical AUM-based fee on the investment advisor side,” Clayton explained. “And then there are a lot of people on the investment advisor side who will feel that’s a better service and better value for them.”

Stevens called the standards of conduct issue for brokers and advisors, along with the Labor Department’s now defunct fiduciary rule, likely “the longest, most convoluted regulatory process perhaps in the history of the SEC and the history of the financial markets.” He asked Clayton why he “tackled” the issue right away.

“I looked at this [issue], it was clear that there was confusion in the marketplace; it was clear that everyone was adjusting their behavior in the face of uncertainty. And when people are adjusting their behavior in the face of uncertainty, costs go up,” Clayton responded. “And our job is to give investors the best access to investment opportunities with appropriate protection, and at the least cost.”

If the SEC “didn’t step up and bring clarity to this space, that uncertainty was going to continue, which was going to raise drag for investors over time, and that’s just inconsistent with what our mission is,” he continued. “So we had to take it on.”

Maintaining choice is also better for investors, Clayton said, “because it leads to competition. Competition among the people in this audience has in many ways” benefited investors over time. “Fees have come down, services have gone up. The investor engagement today is far superior to the engagement a decade ago.”

He added: “People are paying less for better service than they were a decade ago and I want to continue that trend.”

Washington Bureau Chief Melanie Waddell can be reached at [email protected].


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