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News April 25, 2005 Issue

Working With the Business Side: Compliance Officers Skeptical About Being Skeptical

Compliance officers reacted strongly to OCIE director Lori Richards’ keynote speech at last week’s NRS conference, in which she listed “skepticism” as a desirable personality trait in compliance officers.

“Doesn’t being effective in the compliance profession require a skeptical attitude, an innate curiosity about how firm employees and others might be trying to circumvent the law or the firm’s policies and procedures?” asked Richards. “Doesn’t it require the ability to interact effectively with others, particularly when raising difficult issues? Doesn’t it require an ability to be persistent, even relentless, when investigating issues and in raising them with senior management?” An activist compliance professional, she said, carries this attitude of “professional skepticism,” which she described as “assuming that individuals will try to subvert rules and act with their own interests in mind.”  

 

Richards also cautioned against getting too cozy with the business side, noting that examiners have seen situations where compliance “seemed to be captive to a business unit.” In particular, she warned against giving too much deference to big producers and other business types: “If you have compliance staff embedded in business units, how do you make sure they don’t become captive to the business unit?” she asked. “If your firm is dominated by a powerful and charismatic business leader, how does compliance function? Can it too easily be overridden by this person?” 

 

The notion that compliance officers should sit across the table from their business colleagues, rather than on the same side of the table, struck several compliance officers as counter-productive. While, like Richards, they emphasized the importance of interacting effectively with others, they disagreed that a compliance officer must be “skeptical” towards their colleagues. 

 

“It’s very hard to work with people if you treat them as if they are all crooks,” said Barbara Brooke Manning of Citigroup Asset Management. The most effective compliance officers, she said, make an effort to understand their firm’s business and work with their business people, so that the business side will tell them what’s going on and where the problems are. Compliance officers should foster a collaborative atmosphere where business people know they can come to compliance with questions and know that compliance will try to work with them to reach a compliant solution, she said. That way, when compliance really does have to say “No” to something, “you’ll have a lot more credibility.”

 

That approach, she added, “is a lot more effective than playing cop on the beat.” If a compliance officer operates that way, she said, “the business people just ignore you.”

 

“If you go in with a skeptical attitude, you’re not going to get anywhere,” concurred Aaron DeAngelis, director of compliance at Brandywine Asset Management.  Like Manning, he emphasized the importance of building a relationship with the business side. “Try to work with them,” he said. “That’s the only way you are going to be credible.” When developing procedures, “try to involve them and understand what their thinking is,” rather than “shoving” the procedures on them. Similarly, when presented with a question, rather than immediately responding “No,” try to help them get where they want to go, he advised.

 

Of course, he added, “sometimes you can’t say yes.” But if a CCO simply says “No” all the time, “your phone’s not going to ring, they’ll do what they want to do, and they’ll ‘Yes, yes, yes’ you to death” when asked if they understand the compliance procedures.

 

Judy Werner, CCO of Gardner Lewis Asset Management, agreed that compliance must maintain good relations with business. At her firm, she said, she is viewed as a “go-to person,” and business people proactively seek her out. “I get involved before people change their procedures or start a new product,” she said. “If I was looking at them in an incredibly skeptical way, I’m sure they wouldn’t do that.”

 

Rob Stirling, CCO of Eubel, Brady & Suttman Asset Management, questioned whether an adversarial relationship between compliance and the business side is consistent with a culture of compliance. He said that he finds it very helpful to sit in every business meeting he can, in order to get a first-hand look at what is going on in his firm. “You are part of it,” he said. The CCO, he noted, is a corporate officer and part of the firm. “The culture’s not going to be there unless you are an integral part of that fabric,” he said. “To the extent that the SEC wants you to stand back and be not of it,” he added, “I just find that troubling.”

 

Manning agreed that sitting in on business meetings was valuable, so that you can see first-hand what is going on. “You’re not going to get that if the business thinks you are a spy,” she noted.

 

Even Cynthia Fornelli, formerly a high-ranking SEC official, now a senior v.p. at Bank of America, emphasized the importance of working with, not against, the business side. “They are going to tweak their product a little bit, they’re going to tweak their investment strategy a little bit, they might change how they allocate securities to the clients,” said Fornelli, speaking prior to the delivery of Richards’ speech. “Having a constant dialogue with them, as opposed to a quarterly [or] annual meeting with them, is critical, so that you can understand how their business is evolving so that your compliance program can keep up.”

 

Fornelli advised CCOs to have a clear idea of who their client is. “Our client isn’t the SEC examination staff or other regulatory staff,” she said. “You are there to support the business. You are there to make sure that whatever your company’s business model is and whatever your company’s particular products are, you are there to help them comply with the law. That’s who your ultimate client is,” she said.

 

“I think we often lose sight of the business people,” added Fornelli.