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News June 6, 2005 Issue

Inside the SEC's CCOutreach Program

So what went on during the first round of the SECís CCOutreach seminars? Are they worth your time?

Based on the presentation delivered during the May 26 CCOutreach in Del Mar/San Diego, the program includes an overview of the compliance program rule and the SECís expectations for CCOs, a description of the relevant regional or district office (how many staff it has, how many advisers it covers, etc.), and a discussion of the SECís examination process and the typical trouble spots found during exams. Thereís a Q&A session, as well.

One CCO who attended the May 24 seminar in Los Angeles reported that the event appeared to be at full capacity. "The room was packed." she said. "I donít think there was an extra chair anywhere." The audience seemed to consist solely of CCOs, she said, who were given priority in attendance. During pre-registration, she said, "they were even telling you you couldnít bring [other] people from your firm," unless there turned out to be extra space, she said. There did not appear to be any vendors or press in the room, she said.

She said the program lasted about three and a half hours. The speakers, who were all from the Pacific Regional Office, spent "quite a lot of time walking around the room introducing themselves and getting to know who was in attendance," she said. The message she took away: "yes, things change all the time, the focus changes all the time, and examiners get new direction," but that "itís up to you to be prepared." She also said that the staff discussed the need for CCOs to exhibit "professional skepticism."

Overall, she described the presentation as fairly basic and straightforward. "There was no new ground covered," she said. "There were no new interesting twists on old interpretations." However, she said that the information covered was useful, particularly the Q&A portion. "The questions from the audience were direct and the SEC responded as directly as they could," she said. Her advice to other CCOs: "Attend with lots and lots of questions and be specific. They will get to as many of them as they can." She said that each of the tables had several 3x5 index cards available, with a person walking around collecting questions as the panelists were speaking.

Another CCO, who attended the May 26 CCOutreach in Del Mar/San Diego, reported that his event was sparsely attended. "I was really surprised about the lack of attendance," he said. There were only about "25 or 30 people." He attributed the lack of attendance to the geographical area. "Maybe there arenít as many advisers down here," he said.

However, the SEC representatives certainly showed up in force. "They probably had twelve people from the Pacific Regional staff," said the CCO. Director Randall Lee "led the charge," along with three associate directors, about six branch chiefs, and two or three other junior people "who actually do audits."

He described the audience as consisting mostly of CCOs, with no press or vendors in attendance. He noted that attendees who had preregistered for the seminar were required to give their name at the door. "Before you went in, they crossed your name off the list." Keeping it just CCOs seemed to make sense, he said. "They wanted you to speak freely." To that end, he praised the SEC for not giving out nametags to the audience. "They had no clue who we were, unless we chose to identify themselves" when responding to questions. He said that the staffís formal presentation lasted two and half hours, with a fifteen minute break. The staff took audience Q&A for an additional half an hour, and then remained in the room to "just mingle" and meet individually with attendees.

Like the first CCO, he said the presentation covered "a lot of the basics," but he nonetheless found it to be "very useful." For example, he said that one of the things he "got clarity on" was how the new SEC exams are different in terms of frequency and how the opening interviews with the CCO are really the staffís attempt to try to get a feel for the firmís culture of compliance. He said that the SEC staff also discussed the scoring system used by examiners to determine how frequently the firm will be inspected going forward. The staff, he said, was "forthright" about what exactly they are looking for when they come out and do an audit and what their expectations are. "It was very insightful to get those things directly from them, to hear how they actually go about it, directly from the horseís mouth," he said.

He said that the staff discussed key risk areas, such as portfolio management and trading. Within each area, the staff discussed things that they look for during exams. One substantive point: the staff mentioned that even though advisers have disaster recovery plans in place, many firms havenít tested their plans.

The CCO, who said that he was concerned about CCO liability, asked the staffers "how quickly are you guys going to be locking up CCOs for failure to supervise?" In response, "they basically said ĎLook, weíre not deputizing CCOs out there, we want to be a resource for you, we want you to come to us to talk about things, weíre not going to arrest you for whistleblowing, thatís not our intent.í" He said that they explained that for the SEC to crack down on a CCO, the CCO would have had to have been "part of the crime that was committed" or "would have had to have known about it and decided not to do anything about it."

The CCO said that the attendees seemed to be on the less experienced end of the spectrum. "Everyone in there was taking copious notes," he said. (At one point the staffers remarked that they were "really pleased" at all the notetaking activity.)

He encouraged other CCOs to attend. "They should go, and they should feel at ease to ask whatever questions they want to ask."

And take lots of notes.