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News February 6 & 13, 2012 Issue

Rominger Offers Expanded View of Compliance

(The following is excerpted from Division of Investment Management director Eileen Romingerís opening remarks. Due to schedule changes, OCIE director Carlo di Florioís remarks were abbreviated. His official remarks will be reported separately.)

This conferenceís new title, National Compliance Outreach, reflects the principle that responsibility for a culture of compliance doesnít end with the chief compliance officer. It rests with the whole organization Ė investment staff, operations, accounting staff, sales teams, risk management, the CCO, and most importantly, senior management.

The two critical components of a culture of compliance are an ethic of putting clients first that pervades all decision-making, and a carefully designed and implemented compliance program that incorporates the following criteria:

  • It identifies and monitors areas of risk;
  • It incorporates policies and procedures for addressing those risks (Carlo mentioned escalation and the importance of that); and
  • It continually reviews the effectiveness of those policies and procedures.

This last item is important and too often overlooked.

"Habit and heavy workloads and the passage of time can blind even the most diligent staff to aspects of a compliance program that are obsolete or ineffective, and this can be dangerous," said Rominger.

Constant vigilance is especially important in areas such as valuation and disclosure.

Valuation affects not only the pricing of assets but also the fees that an adviser may earn. In our complex and rapidly changing markets, it is no longer enough for an adviser to rely solely on outdated methods of valuation that donít take into account changes in market conditions or best practices in the industry.

Disclosure is another area ripe for active involvement of compliance personnel. Consider, for example, whether the information you will be reporting on revised Form ADV is consistent with the information that you have provided to clients and investors? If the information differs, do you have policies and procedures in place that will enable you to explain this difference? Do you have policies and procedures in place that would allow you to continue meeting your reporting obligations even if you experience employee turnover?

An appropriate degree of formality in policies and procedures coupled with the ongoing assessment of their effectiveness will help your business deal with and be resilient in the face of changing markets, staff turnover, as well as evolving regulatory requirements.

Building and maintaining and executing a robust compliance program that covers issues such as valuation and disclosure are the types of issues where we expect compliance experts can really add value. With support of senior management, compliance personnel will be in a position to evaluate and monitor the risks of the entire business and not just one aspect of it.

Itís a challenging role, but itís a critically important one.