Creating a Culture of Compliance Web Seminar Presentation August 5, 2004 © 2007 SEI Investments Developments, Inc.
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What is the SEI Knowledge Partnership? The SEI Knowledge Partnership is an ongoing source of actionable business intelligence and advice for SEI’s investment management clients. It engages clients and industry experts in analyzing the trends and issues that will reshape business conditions in the years to come. The Partnership is designed to help SEI clients: identify the issues they need to be addressing actively. keep abreast of changing best practices develop more competitive business strategies
Its agenda currently centers on issues concerning: legal and regulatory change business operations marketing, sales, distribution and client service business strategy The SEI Knowledge Partnership is a service of the Investment Manager Services unit of SEI. This information is provided for educational purposes only and is not intended to provide legal advice. SEI does not claim responsibility for the accuracy or reliability of the data provided. This presentation is intended for SEI clients only and may not be redistributed for any other purpose without prior written consent from SEI. Creating a Culture of Compliance
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Agenda 1. Regulatory Update 2. Creating a “Culture of Compliance” How far must you go to satisfy requirements that are broadly defined? What are proactive firms doing to build a culture of compliance? What specific compliance program elements and mechanisms do you need to have in place when the SEC shows up on October 6?
3. What CCO recruitment and compensation standards are emerging?
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Today’s Presenters
Thomas Lemke Partner, Morgan, Lewis & Bockius, LLP Thomas P. Lemke is in the Business and Finance Investment Management Practice resident in the Washington, D.C. office. He concentrates his practice on the full spectrum of investment management matters, including advising mutual funds, investment advisers and broker-dealers. Mr. Lemke is a frequent speaker on and has written extensively about investment management matters and has co-authored a number of books in the area.
Jim Volk Chief Accounting Officer & Chief Compliance Officer, Investment Manager Services, SEI Investments Jim Volk is the Chief Accounting Officer & Chief Compliance Officer for SEI’s Investment Manager Services unit. He is responsible for formulating and communicating SEI’s position on all proposed new accounting rules and regulatory changes that impact the services SEI provides to its clients. He is also the designated liaison for Chief Compliance Officers of SEI’s Investment Manager clients that have registered investment products.
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Today’s Presenters (Cont.)
Cindy Cottman Managing Director, Korn/Ferry International Ms. Cottman is a Managing Director with Korn/Ferry International and a member of the worldwide financial services group based in New York. Ms. Cottman has been an active member of the search community since 1989 in London and New York. Ms. Cottman specializes in legal, regulatory, risk and compliance positions within the financial services sector.
Craig Stephenson Client Partner, Korn/Ferry International Mr. Stephenson is a Client Partner with Korn/Ferry International. Based in New York, he is a member of the Global Financial Markets Practice and a leader within the Legal Specialist Team focusing on Regulatory and Compliance searches. Mr. Stephenson has conducted numerous executive search engagements across financial services and also specializes in senior level technology and operations functions.
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Regulatory Update
Hedge Funds Code of Ethics Mutual Funds’ Use of Soft Dollars Mutual Fund Developments
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Where Do I Start If I’m Just Now Getting Involved With This Effort?
Creating a Culture of Compliance
“…. an environment that recognizes and supports the role of strong compliance and ethical practices” – Lori Richards (SEC)
Read the adopting rule release (it can be found at http://www.sec.gov/rules/final/ia-2204.htm) Start building the platform even if the actual CCO is not yet in place To ensure minimum standard of compliance, start by addressing each of the specific areas outlined in the rule itself Investment Advisors (10) Funds (16) [all 10 of the advisor items and 6 additional items]
Follow SEC recommended approach: Conduct inventory of compliance obligations outlined in Federal Securities Laws Identify conflicts of interest and envision what could go wrong Match existing policies/procedures with inventory of obligations and possible conflicts of interest and identify gaps Formulate new or revised policies/procedures to remove conflicts and close gaps
Involve all senior management and appropriate business units from the outset Make sure your board is fully aware of their approval responsibilities Creating a Culture of Compliance
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Where Do I Start If I’m Just Now Getting Involved With This Effort (Cont.)
Creating a Culture of Compliance
“The CCO is now a risk manager, a strategist, and importantly, an integral part of senior management – someone with a voice at senior corporate levels that cannot be ignored” – Lori Richards (SEC)
Schedule special board meeting for mid-late September to obtain approvals If you use non-affiliated entities as service providers for any of the four types cited in the rule, contact them to inform them that they will need to provide summaries of their compliance programs.
Investment advisor Administrator (fund accounting) Transfer Agent Principal Underwriter
Set specific deadlines for everything and monitor progress (work backward from date of board meeting at which board will approve the overall compliance program) Document everything you do, and keep your documentation! (including emails) [“It’s struck us that we’ve not been seeing a lot of things that are going on within firms because we’ve not been requesting e-mails” – Gene Gohlke (SEC)]
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What Proactive Firms Are Doing To Build A “Culture Of Compliance”
Creating a Culture of Compliance
“Compliance must be as central to the firm as is portfolio management and distribution” – Paul Roy (SEC)
Hiring an “in house” CCO [“I am wary about whether a compliance rent-a-cop could really be up to the task” - Lori Richards (SEC)]
Involving all senior management and appropriate business units from the outset [“the most effective organizations will not be those that employ ‘compliance cops’ without imbuing a ‘culture of compliance’ top-down and consistently through all layers of management and staff” – Lori Richards (SEC)]
Setting internal compliance deadlines that are more aggressive than the statutory deadline of 10/5/04 to allow time for education, training and implementation Holding employee orientation and overall awareness sessions that discuss the “intent” of the Federal securities laws. [“Part of successful implementation is to make sure employees are trained and understand their role in how the compliance function is to work.” – Lori Richards (SEC)]
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What Proactive Firms Are Doing To Build A “Culture Of Compliance” (Cont.)
Creating a Culture of Compliance
“To build and sustain an ethical business culture, to truly fulfill our fiduciary obligations to fund shareholders this demands more than simply conforming our conduct to the requirements of the law. Compliance is absolutely necessary—but not sufficient in itself.” - Paul Schott Stevens, President - Investment Company Institute
Necessitating an “overlap” between compliance program of advisor and that of the funds [It’s important to “increase the coordination with which distributed compliance functions are executed” – The SEC from the Compliance Program Rule Adopting Release”]
Responding swiftly and authoritatively to gaps and conflicts of interest identified as part of the inventory and matching process [“It takes 20 years to build a reputation and 5 minutes to ruin it. If you think about that, you’ll do things differently.” – Warren Buffett]
Documenting the “process” followed to get into compliance, not just the finished product
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What Proactive Firms Are Doing To Build A “Culture Of Compliance” (Cont.)
Creating a Culture of Compliance
Devising plans to periodically test adherence to polices and procedures subsequent to the 10/5/04 initial compliance deadline Discouraging the temptation to characterize current compliance efforts as short term and instead treating them as first phase of a permanent change to how compliance programs must be viewed [“if you view this rule for show, if you take only minimal steps, if you do not believe in its importance, you will fail to seize the opportunity it presents” – Lori Richards (SEC)]
Actually using the term “culture of compliance” when communicating with staff to reinforce the concept of sustainability [“compliance is dynamic, and there is no end to the development and improvement of your compliance program” – Lori Richards SEC)]
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What The SEC Expects To See Beginning On 10/6/04
Creating a Culture of Compliance
“A culture of compliance is a culture where the highest standards of ethical behavior are practiced” – William Donaldson, SEC Chairman
A board-approved, comprehensive document or series of documents that depicts a firm’s overall compliance program (funds and investment advisors) Adequate summaries of the compliance programs of the four named service providers Copies of all briefing materials presented to boards in connection with their review of compliance policies/procedures A well documented summary of the Board’s deliberation process (minutes) Evidence that new or revised policies have been implemented and are being followed Written documentation that clearly portrays the process followed to establish the compliance program A plan for how compliance policies/procedures will be tested as part of the required annual review
What Will SEC Not Expect to See Beginning on 10/6/04: Testing of compliance policies and procedures as part of the required annual review (have until 10/5/05)
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Creating a Culture of Compliance
SEC’s New Focus
1996: Routine SEC inspections conducted once every 15-30 years! 1998: Routine SEC inspections conducted once every 5 years 2004: SEC wants to inspect biggest and “riskiest” firms once every 2 years. More “sweeps”: Market timing/late trading; pension consultants; pay-toplay SEC’s budget has increased; OCIE hired 150 IA/fund inspectors in 2003 (500 total now)
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Creating a Culture of Compliance
Chief Compliance Officer 1. Who does your CCO report do?
CEO/COO General Counsel
54% 30%
2. How much time is your CEO/COO spending on compliance?
0-5% 5-10% 10-20% 20+%
49% 45% 34% 16%
3. Have you held company-wide meetings or issued company-wide communications on fiduciary and regulatory issues?
Yes
88%
Source: U.S. Institute, June 8, 2004
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Creating a Culture of Compliance
Chief Compliance Officer
Chief Compliance Officer Designate existing employee Already have a CCO Separate MF & IA CCO Background
47% 45% No Attorney
54% 53%
Source: U.S. Institute, June 8, 2004 Creating a Culture of Compliance
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Creating a Culture of Compliance
Impact of Additional Regulations Increased Costs Initial Ongoing
84% < $1m < $1m
59% 60%
Increased Personnel
58%
< 2.5 FTE > 2.5 FTE > 5 FTE
52% 48% 9%
No Impact
> $1m > $1m
26% 24%
13%
Source: U.S. Institute, June 8, 2004
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CCO Recruitment & Compensation
CCO Hiring Trends What qualifications are people looking for? Where are people finding their CCO? Trends in compensation
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We hope you found today’s presentation valuable and informative. Please feel to send comments and suggestions to
[email protected]. Your feedback is important to us. Our Korn/Ferry speakers have provided their contact information if you would like to follow up with them with additional questions: Craig Stephenson: 212-984-9342;
[email protected] Cindy Cottman: 212-984-9459;
[email protected] MARK YOUR CALENDARS: The next seminar will be on Thursday, September 9 at noon EST.
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Thank you.
© 2007 SEI Investments Developments, Inc.
The SEI Knowledge Partnership is a service of the Investment Manager Services unit of SEI. This information is provided for educational purposes only and is not intended to provide legal advice. SEI does not claim responsibility for the accuracy or reliability of the data provided.
