INTERVIEW: Board members are accountable for compliance, SEC’s di Florio says

August 31, 2012

By Emmanuel Olaoye

WASHINGTON, Aug. 31 (Thomson Reuters Accelus) – Directors who fail to take an interest in compliance risk the threat of enforcement action from the Securities and Exchange Commission, a top official from the agency said.

In an interview with Thomson Reuters, Carlo di Florio, director of the SEC’s Office of Compliance Inspections and Examinations, said the agency was focused on developing an examination regime that looked at a company’s culture of compliance at every level of management. Board members who are not engaged in the compliance process risk the chance of their firm being referred to the SEC’s enforcement division for fraud or compliance failures.

“Directors need to be engaged in effectively overseeing compliance, and where fraud or other compliance failures occur, that suggest ineffective governance, Enforcement will be focused on that,” di Florio said.

In a conversation that spanned several topics, di Florio said OCIE’s top exam priorities included: the protection of customer funds, the net capital rules, financial responsibility rules, and sales practices. The SEC will also be looking at how firms use technology to carry out their trading strategies.

“I think that’s an area where we want to be focused on, not just for broker dealers but we’re focused on exchanges, clearing agencies, and asset managers,” di Florio said. “We’ll be looking much more at how broker dealers are using technology to effectuate their trading strategies their risk management, controls, and processes they have around the development and monitoring of those technologies.”

The SEC was concerned about firms that have “misaligned incentives,” where some employees such as traders are paid in proportion to the risks in the short term, rather than over several years, di Florio said. He said poor incentives and conflicts of interests are some of the “cultural indicators” that reveal a firm’s culture of compliance.

The SEC also looks at the quality of talent the firm has brought in to address its risk-management and compliance functions. It is not enough, di Florio said, for directors to talk about having a culture of compliance. It must be demonstrated through people hired and the resources allocated to the functions.
Investment Advisers

In the last two to three years, OCIE has brought in quantitative trading experts with Wall Street experience to join its exam team, he said. These experts, working in tandem with OCIE’s traditional examiners, have helped the agency to analyze the data it collects from filings, di Florio said.

Quants have also helped the SEC’s examination of investment advisers, said Drew Bowden, the head of OCIE’s Investment Adviser Exam Program.

Under the Dodd-Frank Act, 1,400 hedge funds and private-equity funds managing $150 million or more in assets must register with the SEC. The new registrants must disclose information to the SEC about their firm, the assets they have under management, and their performance.

Bowden said the information in the data that OCIE collects is a critical factor in deciding which firms are higher risk investment advisers. Analysing the data in filings can help OCIE to identify firms whose assets have risen rapidly in the last few years or those that have suffered a massive drop in their personnel levels.

A study conducted by the SEC in 2011 found that the SEC examined approximately 9 percent of registered investment advisers were in 2010. Lawmakers and many industry observers have criticized that figure as being too low.

It would be a mistake to think the SEC is only looking at 9 percent of firms, Bowden said.

“People draw a number of incorrect assumptions from that,” he said. “People wrongly infer that the 91 percent we do not engage with through on-site examination are just out there running wild and they’re totally off the radar screen. In fact, that is not the case. If we talk precisely, because of the quantitative and analytical work we’re doing, we’re looking at everyone. We’re looking at information on all registrants to help us assess risks and decide where we want to allocate resources to engage in on-site exams.”

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. <a href=” ions/regulatory-intelligence/compliance- complete/” target=_new”>Compliance Complete</a> provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)

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