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News October 25, 2004 Issue

No SEC Sweep on Compliance Programs, Says McHugh

Is the post-October 5 sweep of compliance programs "imminent," or will the SEC "give firms a few months" to see how their procedures are working?

Thatís what an attendee at last weekís SIA conference asked Jennifer McHugh, senior advisor to Division of Investment Management director Paul Roye.

McHughís response:

In "routine examinations from this point on," SEC examiners are "very definitely going to ask" to see an adviserís compliance manual and to meet with the firmís CCO, she said. "Firms should be ready to produce both." However, she added, "I donít believe that OCIE has announced any plans for a sweep in this area."

So, it sounds like thereís no sweep, per se. But, as ICAA general counsel Karen Barr pointed out, every post-Oct 5 exam is effectively about the compliance program. "Itís at the heart of all the issues that the SEC is focusing on," said Barr. Or, as OCIE general counsel John Walsh phrased it at the NRS conference, examiners will be "very interested" in advisersí new compliance programs.

Interestingly, McHughís remarks about the new compliance program continued in the same "kinder, gentler" tone expressed by Roye and other SEC officials at the NRS conference a week earlier. "We understand that the industry has worked extremely hard to meet the October 5 deadline," she said. "If you have questions, we want to make sure we answer them." McHugh said that examiners understand that each firm is different, and they will be sensitive to the fact that smaller firmsí policies and procedures may not be as complex as those of larger firms. McHugh said that "the SEC very much views the CCO as critically important" and as "our partner in protection of investors." She said that the SEC staff is looking forward to working with CCOs and wants to make sure that the SEC establishes a "two-way, open communication" with them.

McHugh also emphasized the importance of ongoing testing. After nine months of getting ready for the October 5 deadline, "you kindíve want to take a break now, but you canít," she said. "Itís an ongoing process." She said that SEC examiners will be looking for advisers to "continuously monitor . . . and test their policies and procedures to make sure they are effective." Examiners, she said, will want to see evidence of effort and attention to the firmís procedures. For example, if an adviserís program detects violations, examiners will look to see whether the adviser considered whether it needed to improve its procedures. Off-the-shelf manuals, she said, "are not going to work."

She also said that OCIE will look at instances in which firms allow exceptions. "Who signs off on those exceptions?" she asked. "That is an area where I think it is safe to say our examiners are really going to focus."