Compliance Solutions for Investment Advisers

The SEC Speaks (and Speaks)

Dear Compliance Professional,
In recent weeks SEC officials have been quite chatty. What differentiates these recent pronouncements from the SEC’s usual speechifying is that the recent stuff contains a trove of useful compliance insights. This Compliance Newsletter summarizes what advisers should take away from this flurry of activity.
If you are thinking that all of this seems rather obvious, did you hear the one about the three advisory firms that repeatedly failed to correct deficiencies cited by the SEC? They are all now subject to SEC Enforcement actions. The point being, is that advisers do not always do the obvious.
Hallmarks of Compliance Programs
In a recent speech, Stephen Cohen, the Associate Director of the SEC’s Enforcement Division, discussed the hallmarks of both a problematic and a successful compliance program. Based on his experience, there are certain early warning signs that indicate that an investment adviser has not fostered the requisite culture of compliance:
  • Pushing the Envelope – Risk taking in the areas of legal and ethical obligations.
  • Technical Compliance – Adhering to the letter of the law, but not the spirit of the law.
  • Lack of Empowerment – Compliance personnel that have limited access to senior management.
Conversely, Mr. Cohen sees an effective compliance program as having the following common attributes:
  • Tone at the Top – Senior management actively supporting the compliance function.
  • Resources – CCO is provided with the necessary resources, independence, standing and authority to be effective.
  • Culture & Values – Advisory firm promotes integrity and ethical values in the decision making process.
  • Incentivizing Compliance – Rewarding the right behavior and not just punishing the wrong behavior.
  • Confidence and Protection –  Eliminating the fear of whistleblower retaliation within the advisory firm.
  • Self Evaluation and Improvement – Advisory firm proactively keeps pace with best practices.
Exam Priorities for New Advisers

SEC Chair Mary Jo White identified five areas that the SEC would focus on as part of the SEC’s initiative of shorter, more streamlined “presence exams” for newly registered advisers. The areas of focus include:

  1. Marketing;
  2. Portfolio management;
  3. Conflicts of interest;
  4. Safety of client assets; and
  5. Valuation.
Advisers that have been in business for a while can anticipate that they will be subject to an exam that focuses on much more than these five areas.
 
CCO Liability

SEC Chair Mary Jo White also assured compliance officers 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.”

We still suggest a good E&O/D&O policy. Make sure that if your firm does have a policy, that it specifically covers the chief compliance officer position.

Hedge Fund Actions
Finally, Chair White detailed the types of enforcement cases being brought against hedge funds. Recent actions have involved charges related to:
  • Insider trading;
  • False advertising and performance claims;
  • Overvaluing assets in order to charge excessive fees;
  • Benefitting favored investors at the expense of other investors; and
  • Using private fund assets for the personal benefits of the fund’s advisers.
Any one of the above violations could apply to any a more typical investment advisory business. And each one of these violations could have been uncovered through a robust compliance testing program.
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