CCOs Feeling Heat from Examiners: Fielding Inquiries a Sizable Burden
April 18, 2005
WASHINGTON - The days of the SEC's five-year examination cycle are over, as more stringent oversight has set forth a new regime under which mutual fund chief compliance officers must keep their heads on a swivel.
In keeping with marching orders from Chairman William Donaldson, the Commission will no longer operate as a reactionary, predictable regulatory agency but rather, it will implement an entirely new approach to oversight. Perhaps the biggest change is that the SEC will be "far less predictable" in its examination of mutual fund shops, said John Walsh, Chief Counsel of the SEC's Office of Compliance, Inspections and Examinations.
Due to the widespread scandal that has pervaded Wall Street and mounting pressure from lawmakers for it to keep its house in order, the SEC is playing catch-up, and the fund industry is on high alert. To stay one step ahead of examiners now, mutual fund CCOs must be swift on their feet and tirelessly diligent.
Speaking at a best practices conference for chief compliance officers sponsored by IA Week and Fund Compliance Insider, Walsh said of the new exam program: "It's in a complete course of evolution. If you were to talk to me a month from now, I can't say that it would be identical."
Walsh told attendees, most of whom serve as CCOs or general counsel for their respective firms, the Commission is focused on taking more flexible action and issuing faster responses. Specifically, that will include an elimination of one-size-fits-all oversight and more coordination with the SEC's enforcement and risk assessment divisions.
In addition, OCIE plans to maintain a dialogue with CCOs over the phone. This will help determine the most appropriate type of regulatory action, whether it is part of a risk-targeted sweep exam, risk-focused cycles related to specific issues such as electronic security, or cause exams based on risks identified at a specific firm.
To speed up response time once red flags have been raised, OCIE is encouraging more regional office leadership and more risk-focused internal reports. Essentially, a staff member who uncovers a problem or potential problem will take ownership of it and carry out the necessary remedial steps.
One exam tactic that has generated a lot of anxiety in the fund industry is examiners' requests for e-mails, particularly those sent and received by the executive suite. "E-mails bring a level of transparency that had not been there previously," Walsh said. However, the SEC has stopped asking for e-mails to and from the CCO in order to give them a little breathing room to do their job effectively. Walsh also noted that the SEC will honor the attorney-client privilege, provided that it is specific and not used as a stalling effort.
"We would be skeptical of any broad defense of attorney-client privilege," Walsh said. "Many CCOs are also lawyers, but everything can't fall under attorney-client privilege."
For their part, CCOs are quickly trying to define their role within fund complexes and get up to speed on the spate of regulatory requirements that has come down the pike. On top of that, dealing with an SEC exam adds a whole other element to their job, one that it is very painstaking and has a myriad of potential pitfalls.
One inquiry from the Office of Compliance Inspections & Examinations could last as long as three months, according to Joe McGill, executive director and compliance officer at UBS Global Asset Management. McGill has fielded six inquiries from the Commission in the last year, as different regional branches have asked for written justifications of its policies and procedures. "They will no longer take your word for it," he said.
Among the list of topics covered in these exams is market-timing detection, closed-end funds, initial public offerings and anti-money laundering. Examiners will look to interview top-level executives during an exam, including the head of trading, chief investment officer and operations head.
"It's really important that you have one person serve as a conduit for what you're providing to the SEC," McGill said. McGill explained that the process is very thorough, involves thousands of pages and as many as 75 items.
In preparation for an exam, ProFunds CCO Vincent Frye recommends going over prior deficiency letters because those topics will be the first items regulators look at. Frye also urged attendees to get an early start on their budget so they can be equipped with the necessary resources to respond to an SEC inquiry.
Another stumbling block the panel identified is rushing information to examiners without getting your arms around what the documents contain. While providing information in a timely fashion is important, delivering the wrong information can really derail the whole process, they said. "It's better to request more time to get them the information they want, than to provide misinformation," Frye said.