Gohlke on Compliance
Speaking at the ICIís Equity Markets Conference last week, Gene Gohlke, associate director of the SECís Office of Compliance Inspections and Examinations, offered the following tips:
You need tone at the middle, too. While itís important to have senior management committed to compliance and demonstrate "tone at the top," thatís not enough. "Managers at all levels within a firm" have a responsibility to develop and keep a culture of compliance "alive and well in their area of supervisory responsibility," said Gohlke.
Risk spotting is not a one-time endeavor. Gohlke emphasized that risk identification is an ongoing process that should continue after the compliance program has been built. He pointed out that markets change, clients change, employees changes, and the stocks that a firm trades can change. Make it "everyoneís responsibility" to spot risks, said Gohlke. If your "staff becomes attuned to issues," they will "bubble those things up to the appropriate levels." Speaking of risk management, Gohlke, a long-time SEC veteran, said he has "never heard of risk management being discussed at the SEC the ways it has been the past six months."
For each control, pick a person. Each control point within a firmís procedures should be made the responsibility of a manager, so that there is accountability. "Tie it back" to an individual, Gohlke suggested.
Conduct transactional as well as forensic tests. Gohlke discussed the two types of testing that advisers should be conducting: transactional, or "day-to-day" testing, and forensic, or "big picture" or "look back" testing. For example, with respect to IPO allocations, transactional testing would confirm that IPOs are being allocated according to the firmís policy. But, asked Gohlke, "how does the firm know that over time that its approach is fair to all clients?" Thatís where forensic testing comes in. "Look at how all the IPOs were allocated over time," said Gohlke. Another tip, provided by Gohlkeís co-panelist, T. Rowe Price lawyer David Oestreicher: go back and look at the performance of similar accounts to see if there are any outliers in terms of performance. If so, research what caused the difference in performance to rule out unfair allocation of IPOs.