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News November 22, 2004 Issue

Outsourcing Compliance Can Be Preferred Solution, Says Walsh

Speaking at last monthís NSCP conference, OCIE general counsel John Walsh indicated that not only may outsourcing compliance be permissible, it actually may be preferable in certain circumstances.

When asked by a conference attendee about the permissibility of outsourcing compliance, Walsh indicated that examiners will look askance at outsourced CCOs that are geographically remote and that spend little or no time within the firm. He noted that in the broker-dealer world, SEC examiners are concerned about "rent-a-FinOP" situations where a single individual serves as FinOP for multiple, geographically-dispersed firms, and "never set foot inside" a particular broker-dealerís office. That, he said "is a model for inappropriate outsourcing" in the investment management context.

However, Walsh went on to add that there may be situations where outsourcing "may in fact be a preferred solution." For example, if a firm has significant conflicts of interest and has "strongly imbedded business interests in favor of maintaining those conflicts of interest," the firm may be "better off to bring in someone from the outside" who can speak to those business interests. In those situations, said Walsh, outsourcing isnít just acceptable, it is "a very good solution."

Bill Meck, senior assistant district administrator in the SECís Philadelphia office, also touched on the outsourcing issue at last monthís NRS conference, but expressed a slightly different view. He indicated that the general position on outsourced CCOs "is that you shouldnít do it" but went on to acknowledge that "itís not verboten, itís not forbidden."

The test, said Meck, "is not whether you do it or not, itís whether it works or not."