Conference Opening Remarks
Lucile A. Corkery, Securities and Exchange Commission; Steven W. Hansen, Bingham McCutchen LLP; James S. Shorris, FINRA; and Robert M. Sulik, FINRA
Lucile Corkery shared that SEC exams will have a new approach for investment advisor firms: a focus on custody verification and the role of the compliance officer. She added that auditors will now reach out to custodian and third-party administrators when auditing advisors for confirmation of client assets and transactions.
Corkery further offered that with the downturn in the economy, many advisory firms are laying off their compliance people. This is a concern for the SEC because they want assurance that the individual taking over that role is someone who is knowledgeable about the Investment Advisers Act of 1940 and the financial services industry as a whole. They do not want to see this role transitioning to someone within the firm who has no experience in this area.
In addition to reaching out to a firm’s custodian, the SEC will also be sending a letter to the firm’s clients to ask for a voluntary response about how the custodian is doing and if the client has any particular issues with the current custodian. Corkery did, however, say that while the response to the SEC letter is voluntary, the SEC will be keeping close tabs on the advisors of clients that do not respond.
See Letter here
2009 Examination Priorities for Investment Advisors
- Custody/asset verification
- Disclosures on Form ADV being current
- Valuation of securities
- Disclosure of firm arrangements with affiliated entities and evidence of conflicts of interest
- Firm operational risks
Compliance and Risk Management Issues
This session focused on a firm’s procedures and specifically on the risk assessment that firms need to do as they do their annual testing of their procedures.
The Risk Assessment Concept presented centered on a firm doing an evaluation of the following areas to determine what level of risk, if any, a firm has:
- Advisory activities
- Operations
- Financials
- Business lines
- Disclosures
- Policies
- Affiliations
- Clients
- Service arrangements
- Service providers
As a firm reviews its potential risk areas, the goal is to:
- develop the necessary policies and procedures to stop any potential harm to clients or the firm, before it can happen
- identify training opportunities for staff
- satisfy regulatory expectations
- help identify and justify compliance staff and resource needs
- create a guide for risk management and set a baseline for the future of the firm
- provide a meaningful report to management
- promote collaboration among various function groups within the firm to help establish a better understanding of the business and importance of compliance to the firm
The questions investment advisors will receive from the SEC include:
- Have you conducted an effective “risk assessment” (i.e., evaluated how your activities, arrangements, affiliations, client base, service providers, conflicts of interest and other business factors may cause violations of the Advisers Act or the appearance of impropriety)
- Did this risk assessment serve as the basis for developing your compliance policies and procedures?
- Do you periodically re-evaluate your risk assessment to determine that new, evolving, or resurgent risks are adequately addressed?
Code of Ethics and Personal Trading
The general requirements for a firm’s personal trading/code of ethics can be found at Rule 204A-1 of the Investment Advisers Act of 1940. A firm is to adopt a Code of Ethics (“Code”) and have its access persons read and sign an acknowledgement for the Code. (Access persons are those individuals who have access to nonpublic personal information about clients.)
The top SEC deficiency is in the area of personal trading. The issues identified by the SEC are the Adviser’s Code of Ethics was incomplete or not followed, the reporting requirements were not followed and/or monitoring was not performed, and disclosure was inaccurate for what the firm is doing.
A good way to ensure your Code of Ethics is appropriate is to review it annually to determine if revisions are necessary, dependent upon how your firm operates, and to be sure your access persons are properly trained about your firm’s procedures to ensure compliance.
Considerations for Enhancing the Compliance Function
This session covered what investment advisors can do to make their compliance function as robust as possible. Some of the tips offered include:
- The structure of your compliance department should consider your business lines, personnel, the size of your firm and advisory services offered.
- Adopt firm policies and procedures and train personnel to help them comply with your procedures;
- The supervisors at your firm should be clear on their role and compliance functions.
- Senior management’s support of compliance is paramount. The “tone at the top” is suggestive of the support needed to help compliance and the firm succeed.
- The chief compliance officer must have the appropriate knowledge base, authority and seniority to carry out this important function for the organization.
Components of an effective compliance program include making sure policies and procedures are established, maintained, reviewed, modified as necessary and tested annually.
If you would like more information about the NSCP conference or Regulatory Compliance’s ongoing investment advisory Compliance Partners programs, please call 603-434-3594.
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