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News March 7, 2005 Issue

OCIE Chief Urges ‘Activist’ Compliance Programs

OCIE director Lori Richards is urging advisers to establish what she’s calling an "activist compliance program." An effective compliance program can’t be "done," explained Richards. It must be a "living, breathing" program that continues to evolve. And, she added, the effectiveness of the program must be "measured by the results."

Here are the characteristics of an "activist compliance program," as described by Richards at last week’s ICAA/IA Week compliance conference:

  • Respect. Compliance must be respected within the organization. Compliance must have the "utmost support" from the top of the organization, said Richards. The firm’s business leaders must "believe in and maintain a high fiduciary standard of honor and business ethics."
  • Resources. The firm’s compliance effort must be "well-resourced and populated by staff with expertise." Firms that are now spending lots of money and time on compliance "and doing no small amount of complaining" probably should have been "better resourcing their compliance infrastructure" all along. These firms, she said, "are now catching up."
  • Awareness of conflicts. Compliance professionals must continually be aware of conflicts of interest, said Richards. She described "one of the most powerful" conflicts as the desire to grow assets under management, and therefore increase the advisory fee received by the adviser, at the expense of advisory clients. Examples of how conflicts can manifest themselves: by lying or fudging performance, paying or receiving undisclosed payoffs or kickbacks, front-running and other abusive personal trading, self-dealing, and, of course, "out and out theft."
  • Skepticism. The individuals involved in implementing the program "must possess an attitude of skepticism," said Richards. They must be creative in thinking about ways that rules could be subverted and ethical standards breached, even by the best of people.

On that last note, OCIE examiners certainly seem to be taking a skeptical view of advisory firm personnel. Later in the conference, OCIE associate director Gene Gohlke observed that "the fact of life" is that many firms have people who are looking to see how far they can test the system and line their pockets. "People are testing the boundaries," he said. "They are scheming."

Gohlke’s co-panelist, Peter Mafteiu, warned of a less overt character flaw: bias based on past experiences. "One of the greatest risks," he said, "is the personal bias of individuals." When dealing with an employee who says "Well, at the bank, this is the way we did it," or "Well, when I was a million-dollar producer at [a big brokerage firm], this is the way I did it," it can be difficult to be kind and courteous, said Mafteiu. He warned that those types of personal biases "make a really bright person not look at their policies and procedures and not remember what they read."

In her speech, Richards said that OCIE does not see the compliance rule "as an opportunity for an exercise of ‘gotcha’ — that is, using the compliance rule as simply another way to make enforcement referrals." Instead, she said, the rule provides "an enormous opportunity to improve compliance in the asset management industry, and I view CCOs as our allies in our mission to protect investors."

Richards also reported on the results of those "getting to know you" phone calls made to CCOs in October and November. Of particular interest, she noted that all of the CCOs contacted reported that they had implemented all policies and procedures they believed necessary. "This was surprising to me," said Richards, given that "a robust compliance program is one that ‘lives and breathes,’ and contemplates ongoing improvement."