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Regulator Mind Reading

Monday, June 27, 2011

Being a CCO is a very demanding job. CCOs have to balance being the bad guy with remaining open so that people feel comfortable interacting with them. They have to keep the lines of communication open while maintaining control. It’s like a high wire act at the circus, one misstep and you better have a safety net. And with the Dodd-Frank Act and the ever changing regulatory environment, the CCOs balancing act is even more precarious.

Being able to read a regulators mind would be a very useful ability for a Chief Compliance Officer to possess. But absent that ability, reviewing the cases brought by regulators against firms can give you a pretty good idea of what’s on their mind. When I look at the cases brought by the SEC in May, I wonder if Chief Compliance Officers realize they are in the regulators crosshairs. CCOs may be the police for the industry but the regulators are internal affairs.

The SEC and FINRA are being very strict in their compliance reviews of Broker-Dealers and Investment Advisers. In the May decision regarding Wunderlich Securities Inc. it is obvious that CCOs are under scrutiny and they need to be aware that they can and will be held liable for the compliance failures of their firm. . In this case the CEO and CCO were both cited and fined and the firm was ordered to pay a disgorgement of $369, 336.15.

Wunderlich was cited for several issues. First they were found to have overcharged advisory clients on thousands of transactions over the course of at least three years. While it is obvious that these charges were the result of a problem with the operational entry of the orders, the firm’s internal systems for fee reviews did not uncover the errors and Wiswall, the CCO, should have known that is was occurring. At least that’s the regulators perspective.

They also failed to satisfy the disclosure and consent requirements of Section 206(3) of the Advisers Act when Wunderlich engaged in principal trades with advisory clients and did not disclose this to the clients nor obtain their consent. Even when an outside consultant brought this issue to the CCO’s attention in 2007 no action was taken.

Another issue was the failure to adopt, implement and review written policies and procedures which are mandated under Rule 206(4)-7 of the Advisers Act. Wiswall had purchased an “off the shelf” Compliance Manual but had not customized it to reflect the firm’s policies and procedures. In addition Wiswall failed to establish, maintain and enforce a written code of ethics mandated by Rule 204A-1 of the Advisers Act even though the outside consultant had brought it to Wiswall’s attention. Finally Wiswall failed to complete the annual risk assessment that is required under Rule 206(4)-7 of the Advisers Act.

The SEC’s actual language is always important to note. They said, “WSI Failed to Satisfy Disclosure and Client Consent Requirements When WSI Engaged in Principal Trades with Clients, and Wiswall was a Cause of the Violations and that Tracy Wiswall and Gary Wunderlich “willfully aided and abetted and caused WSI’s violations relating to its written policies and procedures and written code of ethics”. This is very strong language and all CCOs should take it to heart. Wiswall was fined personally $50,000, Wunderlich $45,000 and the firm must pay $369, 336.15 to the affected clients.

The moral for CCOs is make sure you have policies and procedures in place, adhere to all rules and regulations, and be firm when bringing issues to your superiors. After all it’s your neck that’s on the line when the regulators come knocking. Being proactive is always easier than being reactive and more cost effective in the long run.

About Red Oak Compliance Solutions

Red Oak Compliance Solutions is a leading provider of intelligent compliance software, offering a range of AI-powered solutions designed to help firms of all sizes successfully navigate the increasingly complex regulatory landscape. Our suite of 17(a)-4/WORM compliant features offer risk minimization, cost reduction, and process optimization capabilities with features that are designed to evolve with our client’s needs. Our flagship advertising review software enables firms to deliver compliant content to the market with confidence, faster. Our Disclosure Management and Intelligence solution simplifies the management of disclosures, while our Registration Management solution automates and streamlines the licensing and registration process, further enhancing your internal processes. 

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