SEC Commissioner Acknowledges CCO Concerns
CCOs, take heart: your cries have not fallen on deaf ears.
In an April 27 speech, SEC Commissioner Paul Atkins hit on a number of complaints voiced by CCOs in recent months. Atkins said that heís heard how costly it can be to respond to document request lists, that some "targeted" exams have lasted for months, and that firms have been hit from all sides with document requests. "I have heard anecdotes about firms receiving essentially simultaneous, overlapping document requests from multiple regional offices of the Commission," he said. "We must ensure that the right hand knows what the left hand is doing."
Atkins urged registrants to let the SEC know if "things go badly" during an exam. In addition to the SECís new exam hotline ((202) 551-EXAM) and e-mail (ExamHotLine@sec.gov), Atkins invited firms to call his office directly, at (202) 942-0700. "I would be happy to hear your comments, as well," he said.
E-mails. Atkins acknowledged that the SECís intensified interest in e-mail "has proven frustrating and costly for firms." He noted that searching for and producing e-mails within the deadlines established by staff can be challenging. "Our staff needs to look at e-mails as part of its examinations," said Atkins, "but we owe firms clear guidance on what electronic messages they need to keep, how they need to keep them, and how long they need to keep them."
CCO resources. Concerned about answering those tricky CCO resource questions on OCIEís new exam request list? Youíve got Atkinís sympathy. Discussing budget issues with regulators could heighten tensions between CCOs and their business colleagues, he said, "and is unlikely to produce reliable information for the staff." Atkins questioned whether CCOs would always be incentivized to tell SEC examiners that they would like a larger budget and more employees.
No gotcha. Atkins said that the SEC should not employ a "gotcha" mentality. "It may be unnecessary and counterproductive to penalize a firm that has identified a problem, notified us, and corrected the problem," he said, citing a 2004 case where a broker-dealer was fined $1 million for recordkeeping violations and a related failure to supervise, even after conducting an internal investigation in response to an employee complaint, disciplining the employees involved, and alerting the SEC to the problem. "If CCOs fear that every time they call us they will generate a compliance exam or enforcement referral, they will not be inclined to keep us in the loop," he said.
On that score, Atkins said that CCOs should not place "undue emphasis" on the so-called "youíll never work in this town again" footnote (not Atkinís words) in the compliance program adopting release (the one that says that a person who fails to carry out his duties as CCO for one fund would be the subject of enhanced SEC staff scrutiny if another fund board approved that person to serve as CCO). It would be surprising if the SEC staff, when evaluating a compliance program, did not consider the CCOís track record, along with many other factors, he explained.
Cost of compliance. Atkins emphasized the SECís goal of protecting investors and said that the agency should not lose sight of the fact that "compliance efforts are not the end in and of itself." A good compliance program, he said, is important, but comes at a cost. "Investors pay for compliance efforts through lower returns on their investments," he said. "Not only do the employees and technology dedicated to compliance cost money, but there is an opportunity cost when employeesí focus is diverted from their primary tasks."
Interestingly, he indicated that an outside CCO "may be the best option for some firms."
SEC operations. Atkins urged the SECís regulatory, compliance, and enforcement staffs to work together and avoid a "silo" mentality. As he did in another recent speech, Atkins questioned whether OCIE should be folded back into the SECís operating divisions (OCIE was formed in 1995 primarily by pulling SEC staff out of the Divisions of Market Regulation and Investment Management). While putting OCIE back in the divisions might provide better interaction between the SECís rulewriters and examiners, he said, the benefits from a stand-alone OCIE "might weigh in favor of implementing more moderate measures to improve coordination between OCIE and the divisions."
CCOs not deputies. Atkins echoed Chairman William Donaldsonís recent remark that the CCO "should not view himself as a deputy of the Commission." A CCO who views himself as such might find that his effectiveness within his firm could be compromised, he said. "As we establish our relationships with CCOs, who are understandably squeamish about the scope of their responsibility and liability, we need to keep in mind that they do not work for us."
Howíd Atkins hear about all this? "Itís been building," he said in an interview. "I keep hearing these stories." Atkins noted that quite often the stories will be relayed along the lines of "this happened ó maybe to not me, but to a friend of mine." He acknowledged that registrants have a concern about voicing specific concerns to their regulator. "People are afraid of retribution," he said. Some registrants, he said, "feel that they cannot speak freely with the SEC staff, including Commissioners." That, he said, is why his speech focused on the issues it did. If people have concerns, "we ought to talk about it," Atkins said. "That is why we set up that e-mail and telephone hotline." He added that he and others at the SEC have discussed the possibility of establishing an industry ombudsman.