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SEC Office of Compliance to Heighten Radar


ORLANDO - Be prepared to get to know your Securities and Exchange Commission compliance officers better. The SEC plans on making longer and, perhaps, more frequent compliance examinations.

Lori Richards, director of the SEC's Office of Compliance Inspections and Examinations, made the warning when outlining the division's top priorities at the 2002 Mutual Funds and Investment Management Conference, which the Investment Company Institute and the Federal Bar Association held here last month. Richards attributed the heightened scrutiny to the rash of new mutual fund rules that the SEC has recently implemented.

"There has never been a time like this when funds and advisors [have been] subject at once to so many new rules and regulations," Richards said. "If our examiners are onsite with you longer than in the past or longer than you'd expect, that's why."

Currently, the SEC examines fund complexes once every five years. However, the commission is currently considering several proposals to add some type of interim oversight, Richards said. One such proposal would require a fund complex's advisor to conduct an internal review between SEC formal examinations, Richards said. The proposal would require the firm's general counsel or compliance staff to send a summary report to the SEC, she said.

While self-inspection might seem favorable to firms, it could lead to additional problems with regard to compliance and liability, warned Robert Frenkel, managing director and general counsel of global mutual funds for Citigroup Asset Management of New York.

Shifting "the burdens of compliance . . . to one point . . . person signing that letter" could put undue liabilities on that person, said Frenkel. "I personally, wouldn't want to have to sign that letter," he added.

Still, Richards maintained that should the SEC require interim oversight, the Commission would only ask firms to confirm that they are compliant with written policies and procedures, not for assurance that they are not in violation of the rules. Also, nothing would be asked of firms that is not already asked during onsite examinations, she said.

Other Priorities

While the possibility of more frequent oversight may not be welcome news to fund companies, Richards said the SEC has recently made a change to its inspection process that firms have found to be helpful. Two months ago, the SEC began requiring its compliance officers to hold informal meetings, or exit interviews, with fund executives, she said. These meetings give fund companies a chance to point out areas that they believe examiners may have overlooked, as well as to make immediate changes to procedures the SEC deems deficient, Richards said.

Robert Zack, senior VP and acting general counsel at OppenheimerFunds of New York, attested that these meetings are helpful. "The inspections process has evolved quite a bit over the years, and one very positive change is . . . exit interviews," Zack said. They have given Oppenheimer a chance "to respond to comments, to prepare additional information for the examiners, and to have a sense of where the process was headed."

Another priority of the Office of Compliance will be firms' compliance with the anti-money laundering provisions of the USA Patriot Act of 2001, which President Bush signed in October of last year, Richards said.

The SEC's new focus on fair-value pricing procedures (MFMN 5/7/01) will cause that to be a focal point during examinations as well, Richards added. The commission is not concerned that the values fund companies use are 100% correct, but that the procedures are at least adequate and adhered to, and that shareholders are made aware of any policy changes, Richards said.

The SEC's requirements strengthening the role of independent directors, as well as the fund names rule requiring at least 80% of the holdings of a fund with a specific name be invested in that sector, are other areas examiners will focus on, Richards said. The independent directors rule became effective in February and the names rule becomes effective July 31.

Examiners will also be concentrating on practices of best execution regarding transactions between investment advisors and broker/dealers, Richards said. Over the past two years, the SEC has conducted a special review of fund advisors' processes for seeking to obtain best execution, and that issue was recently made part of routine examinations. While advisors are not responsible for getting the lowest commission cost, they are responsible for obtaining the most favorable transaction for clients under available circumstances, Richards said.