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News November 7, 2005 Issue

OCIE Director Emphasizes Importance of Compliance and Communication

Compliance matters. And effective compliance requires open communication between SEC staff and industry compliance professionals.

Those were two key themes of OCIE director Lori Richards’ keynote address at last month’s NSCP conference. Richards began by citing a recent Wall Street research report that divided the top 25 mutual fund complexes into three groups, depending on their involvement in the market timing and late trading scandals. The report calculated the growth rates of the firms in each category in the 18-month period after the scandals came to light. "The funds that were very much involved [in the scandals] shrank by 24 percent, while those that were somewhat involved grew by 13 percent," she said. "Those that were not involved at all grew by 15 percent."

The moral of the story: Compliance matters. "What’s good for investors is good for firms that do business with investors," said Richards. "The next time someone says to you: ‘compliance is a cost center, not a business center,’ you should reply, ‘when was the last time your department had a 15 percent impact on the growth of this business?’"

Richards also emphasized the importance of communication between SEC examiners and industry compliance professionals. OCIE, she said, needs to get information from the industry to identify risk areas and issues that require regulatory attention, and to reach appropriate conclusions. "We need it quickly, and we need it to be reliable," she said.

On the other hand, open lines of communication with the SEC also should be important to the industry, Richards said. "In fact," she asserted, "one of the more important functions of a compliance program is to get information to regulators." For example, say a firm finds a compliance problem and examines it and fixes it (by repaying customers or investors if necessary). Say the firm determines that the problem was only a bump in the road. In Richard’s view, that finding should be communicated to OCIE.

She explained that it is often difficult for SEC examiners, "coming in from the outside, as a regulator," to determine the seriousness of a situation. "Is it a compliance problem that you identified and quickly resolved, or is it an indication of deep-seated or systemic problems at your firm?" she said. "Your ability to deliver quality information to us about the incident will have an important impact on how we respond." And, in turn, the industry’s ability to deliver that information "in an effective and efficient way will be enhanced if we have open lines of communication, if we have a solid professional relationship, and if we have a history of honest and reliable dealings," she said.

To that end, Richards noted that the SEC’s Exam Hotline (202) 551-EXAM is staffed with senior examination attorneys in Washington DC. Senior OCIE officials have been handing out their personal phone numbers (Richard gave her number: (202) 551-6200). And, she added, the SEC plans to publish the names and phone numbers of exam program managers in the SEC’s field offices on its website.