Keeping it Real: Practical Tips for CCOs (Part 1 of 2)
There were plenty of practical ideas delivered during last week’s NRS conference. Here are some highlights:
1. When it comes to procedures, perfection can be the enemy of the good. Bank of America senior v.p. Cynthia Fornelli noted that many of the SEC’s rules talk about “reasonable” procedures. Her advice when drafting procedures: “Don’t make it too complicated.” In this regulatory climate, she noted, there can be a temptation to build the “Taj Mahal” of compliance programs. But overly-detailed compliance programs can be “hard to implement and hard to monitor.” She cautioned CCOs to try to find the balance between complex procedures and procedures that are workable in real life. “This is something you are going to have to live with,” she noted.
2. Know the difference between covering yourself and leaving a roadmap. This was a theme throughout the conference. Dechert counsel Elizabeth Knoblock noted that many of the documents a compliance officer writes are written as much for the SEC as for any of the firm’s clients. One example: a procedure that says “We don’t do this.” Knoblock suggested that even if a firm doesn’t engage in a particular business activity, the firm nonetheless create a “placeholder procedure” stating that the firm does not engage in the activity but if it does so in the future, will adopt reasonable procedures to address the activity.
Fornelli noted that in the current regulatory environment, people “are afraid to write things down” for fear of creating a roadmap for regulators. She noted, however, that in some instances it may make sense to actually write things down. In particular, she suggested that CCOs memorialize the reasoning behind policy calls. “I think it is important to articulate why you think your policy or your compliance position is reasonable,” she said. Three years down the line, she noted, the decision-makers might not remember why they came out the way they did, or some of the people who were involved in the decision may have left the organization.
Moreover, a written explanation of your reasoning can serve as protection if your decision is questioned with the SEC’s 20/20 hindsight. There is “definitely a perception within the industry that regulators are changing the rules as we go along” and that the SEC and other regulators perhaps “rulemake by investigation . . . or enforcement action,” said Fornelli (she wasn’t necessarily saying that was the case, she added). If a compliance officer has a document outlining the reasoning behind a particular decision, she said, it will be “very hard for a regulator to accuse you of fraud,” although she noted that a firm still could receive a deficiency letter comment on the activity. “A lot of these issues aren’t black and white, they are kind of in the grey area,” she added.
Ann Oglanian, managing director of Regulatory Management Company, said that a memoranda of a policy decision should cover the “who, what, where, when, and why” of the decision. As to the “who,” she said, “you don’t just want that to be your name.” She suggested that compliance officers identify the resources used when coming up with a decision, such as consulting with outside counsel or involving other individuals within the firm.
3. From time to time, lift your head up and look around. Fornelli noted that her new job at Bank of America is to “take a bird’s eye view of the organization” and anticipate risks and trends. She urged all compliance officers, whether at big firms or small firms, to take a broader view as well. “It’s very easy to get bogged down in the details and keep your head down and not look up,” Fornelli noted. Her advice: “step back” and “look across silos” in order to assess risks on an organization-wide level.
To help identify risks, she suggested some broad themes that compliance officers could examine to identify practices within their firms that could lead to conflicts:
Clients — How do clients come into the firm? How does a client move throughout the firm? What does the firm know about each client?
Employees — What are employees’ personal securities trading activities or outside business activities?
Information — What information does the firm have and how might that create a conflict? “If one side of the house knows something, is that good or bad if the other side knows?” asked Fornelli. “Should the other side know? Who gets to know?”
Products — What kind of products does the firm offer? How does it sell and distribute the products?
By thinking about conflicts in that sort of “bucketed” approach, said Fornelli, “you will get most of the conflicts that fall within [each] bucket.”
Oglanian cautioned, however, that to identify conflicts, “you have to have a lot of experience.” She suggested that relatively inexperienced compliance officers seek outside guidance to help to “tee up” the conflicts and also to help weigh them, once identified. “If you start off in the wrong place, you will end up in the wrong place,” she warned.
4. Tap into free resources. CCO resources continue to be a focus of SEC examiners’ questions. Panelists advised compliance officers to take advantage of free resources. In a particular, they agreed that networking with other compliance officers — a free resource — is one of the best resources for compliance officers. “Each one of you is a resource for each one of you,” Knoblock told attendees. At conferences, she said, compliance officers should network in an effort to meet people who perform similar functions in their firm or work in a similar type of firm. Take their business card and tell them “I’d like to call you sometime,” she said.
Compliance officers can set up informal calls or establish regional, in-person meetings. One notable example is the Philadelphia Compliance Roundtable, which holds meetings twice a year. Members of that group also consult each other informally throughout the year.
Forming a regional group “is a great networking opportunity,” said Knoblock. “Each one of you can do that,” she told the audience. Oglanian pointed to another benefit of creating a regional group: In addition to serving as a resource to bounce questions off, the forums help reassure CCOs that other people are going through the exact same thing they are going through. “There’s some comfort in that,” she said.
If your firm is large enough, you can even do this internally, by holding regular meetings to share intelligence and discuss hot topics. Fornelli said that at her firm, there is a group that discusses current events in a monthly conference call. Her colleagues might report on information learned at conferences or read in industry publications, she said. “It’s hard to keep up with everything,” noted Fornelli.
Another free resource: “clients and friends of the firm” memoranda put out by law firms. Even if you aren’t a firm client, you can often sign up to be on a firm’s mailing list, under the theory that you are “in some possible way a prospective client,” said Knoblock. Moreover, many law firms simply have a web-based sign up form, which is open to all comers. “No law firm will turn you away,” said Fornelli.
Oglanian pointed out another advantage of law firm memos or other third-party summaries: they can be used as a tool to keep your firm’s CEO informed. “Instead of me telling them there’s been an enforcement action, I let Dechert tell them there’s been an enforcement action,” she said. Oglanian noted that she might add her “two cents” to the memo, to make it more relevant to the firm’s particular business operation.
The SEC’s website also was cited as a valuable free resource. The site features transcripts of SEC speeches and statements made at SEC open meetings, as well as SEC press releases.
5. Ask your lawyer to split the bill. Oglanian noted that some SEC examiners have been asking to see copies of the firm’s legal bills. When told “we want to see the bills,” Oglanian said that her response, on behalf of clients, has been “it’s privileged and we won’t give it to you.” That, she said, was hard to do.
Knoblock suggested an alternative solution, with origins in the tax world. The Internal Revenue Service, she said, “has long been out there asking for legal bills” and the solution that tax lawyers in private practice have come up with is to split the bill, by preparing a cover bill that lists simply the price, time, and lawyer who rendered the advice. That’s the “official bill,” she said. Then, underneath that, is a descriptive part of the bill providing details what, exactly, was worked on. That part of the bill is marked “Attorney-Client Privileged,” and is not handed over to regulators.
“If you are worried about that, you have the right to ask your counsel to prepare bills in that way,” said Knoblock.