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News September 6, 2004 Issue

Canary’s Legacy: A Year Later, What’s Different?

The storm hit, and hit hard. But has the dust stirred up on September 3, 2003 finally settled?

Depends on how you look at it. While the SEC, New York Attorney General Eliot Spitzer, and other state regulators continue to bring late trading and market timing cases, the once-steady drumbeat of headlines has long since slowed to the occasional trickle. Itís unlikely that any mutual fund reform bill will be enacted as a result of the scandal, despite the frenzy of legislative activity last fall. And the SEC has adopted all but three of its thirteen scandal-driven rulemakings.

For advisory firms operating in todayís regulatory environment, however, the dust is still swirling. As investment management lawyers and compliance officers know all too well, advisers are facing a host of new, costly projects as a result of the scandal:

  • Implementation of new compliance programs (while the rule was proposed pre-scandal, it was adopted two months after the Canary complaint hit. The rule, by the SECís words, was "designed to curb the abusive practices recently uncovered");
  • Adoption of personal trading code of ethics (if certain fund group executives hadnít allegedly engaged in market timing themselves, its unlikely that the SEC would have adopted an Advisers Act personal trading rule);
  • Addressing the issue of e-mails by outsourcing retention, purchasing a software product, or developing in-house technology expertise (remember how OCIE seized on e-mails shortly after the scandal broke?); and
  • Responding to any SEC sweep, examination, or enforcement inquiries that may happen to come the firmís way.

Specific projects aside, the general tone coming out of the SEC has changed. "Things have been kicked up several notches," observed Hansberger Global Investors general counsel Chris Jackson. When it comes to compliance, he added, "the SEC has upped the ante." Compliance officers are expected to be part-strategist, part risk-manager, he said. And, he added, compliance officers now serve several masters: their employer; the SEC (which has stated that it views CCOs as an ally); and, for fund advisers, the fundís board. That, he said, is going to make CCOs "think very hard about issues and how they approach things."

Patrick Burns, a consultant with The Beverly Hills Regulatory Consultants Group LLC, agreed. Heís even heard of some compliance officers contemplating "leaving their compliance careers," although he said he hasnít yet seen an actual example of "someone who has decided to pack it in because of these requirements."

The good news: although life is tougher, the role of compliance officers has been elevated within firms. CCOs may find it easier to obtain staffing and budgeting resources than they did a year ago. "Business people are starting to get it," noted Jackson.

And business people dealing with good compliance officers should consider themselves fortunate. Burns reported that some firms are finding it difficult to identify "really qualified people" for legal and compliance roles. Moreover, firms are realizing that they have "to pay these people according to the level of seniority that theyíre going to be operating within the firm." Compliance officers, said Burns, are commanding salaries that are 200 or 250 percent higher than what they did "even two or three years ago." He added: "Thatís a tough pill to swallow for some of the firms, but lack of human resources commands it."