Wednesday, July 15, 2015

SEC Hosts National Compliance Outreach Program for Broker-Dealers

By Jacquelyn Lumb

Chair Mary Jo White welcomed attendees to the SEC’s annual compliance outreach program for broker-dealers during which the staff shared its initiatives and priorities with the industry. White said that transparency with the industry is a priority of the Commission’s national exam program, which is why the Office of Compliance Inspections and Examinations, for the last three years, has released its planned areas of focus for the upcoming fiscal year based on practices that may pose risks to investors or issues of concern that have been identified during examinations.

Risk alerts. White added that the staff also publishes risk alerts, in part to help compliance professionals evaluate their controls and procedures in these areas. A recent alert announced this year’s plan to focus on the retirement industry and last year an alert announced that the staff would focus on cybersecurity. Cybersecurity was the topic of the outreach program’s first panel, which reviewed general examination findings, industry practices, and controls designed to mitigate cybersecurity risk.

Enforcement. White said the SEC’s enforcement program is another way to emphasize the importance of strong compliance programs. The SEC’s orders highlight areas where a compliance program operated effectively to identify misconduct, but also areas where those programs failed. In appropriate circumstances, the SEC will require that firms engage independent consultants to ensure that compliance policies are created to prevent a recurrence of the identified misconduct.

White emphasized that it is not the SEC’s intent to use its enforcement program to target compliance professionals—it will only take actions when there is significant misconduct or failures. The SEC will not bring cases based on second guessing compliance officers’ good faith judgments, according to White, but only where their actions cross a clear line.

Current priorities. White advised that the examination program’s current priorities include fee structures; suitability; order routing conflicts, recidivist representatives; microcap activity; excessive trading; and transfer agent activity, in addition to the retirement industry.

The compliance outreach program also included panel discussions on anti-money laundering risks and vulnerabilities, firm and branch supervision and sales practices, and the staff shared its insight from both the SEC’s and FINRA’s examination programs. White said that OCIE is currently developing its priorities for the 2016 fiscal year and they will be published upon completion. She said the staff welcomes input on risk areas and vulnerabilities that should be included among its examination priorities.

Regulator’s panel. During discussion about the SEC’s and FINRA’s examination program, the regulators mentioned the PCAOB’s inspections of audits of broker-dealers, and particularly its findings related to auditor independence. Compliance personnel should bear in mind any activities that may impair the auditor’s independence. The PCAOB also has identified deficiencies with respect to some of the audits of broker-dealers. The regulators recommended the PCAOB’s website as a resource for useful information for the industry.

Michael Ruffino, executive vice president, and head of member regulation-sales practice at FINRA closed with a list of items that identify a compliance-driven firm. First, he highlighted not only tone at the top, but also in the middle and at the bottom. Second is the recognition that good compliance is good business. Third, compliance should be a partner with the business side, not an adversary. Fourth, he said the customer comes first from a fiduciary and suitability standpoint. A firm should always ask if a product or service is in the best interest of the customers. Finally, he said ethical behavior is the only behavior, and firms should settle for nothing else.

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