I recently received an article from Richards, Kibbe & Orbe Partner and Practice Center Contributor, Eva Marie Carney, which discusses a difficult quandary for many investment advisory firm principals, in-house counsel and compliance staff when faced with an on-site regulatory examination. Will documented efforts at good compliance simply make their firms “look bad,” considering it will include the logging of deficiencies and cataloguing of remediation efforts? Here is an excerpt from the article co-authored by Carney and Michael Mann, Turning Lead Into Gold: Implementing Compliance Requirements so That Your Registered Firm Is Shown to Best Advantage:
The more than 1,350 investment advisers that have registered with the Securities and Exchange Commission (“SEC”) since the effective date of the Dodd-Frank Act (July 21, 2011) are in a quandary. They are striving to comply with new books and records and compliance program requirements. Consequently, they are retaining emails and tasking their compliance departments with review of emails and other records to identify violations and even poor tone. They are logging departures from their codes of ethics to comply with the new detailed pre-clearance and reporting requirements imposed on registered advisers. And they are creating and maintaining yet other records of their compliance reviews and the actions taken in response to such reviews. At the same time, knowing they face the prospect of onsite SEC examinations, they are worrying that all this new compliance-focused documentation will be the first material the SEC examiners review. As adviser’s counsel, we often are asked whether such efforts at good compliance will simply make the firm “look bad,” and to address how an adviser can approach compliance review and documentation in a manner that puts its best foot forward when the SEC finally does pay a visit.
In the authors’ view, documentation that reflects a robust compliance review process and commitment to remediate identified compliance issues is evidence of strong tone at the top and will foster regulators’ confidence in the firm. This client note discusses strategies for approaching compliance reviews and documentation that we believe, if implemented, will permit firms to create proverbial gold out of what could be viewed as the lead weight of new compliance requirements.
Embrace the notion that any firm with a robust compliance program will find that the firm is not perfect. People are not perfect. Breaches of policies and procedures occur from time to time. Personnel misread policies and neglect to follow procedures, even when they have been well trained. Further, policies and procedures are subject to correction and enhancement — sometimes, with experience, they are found to be unclear or inadequate.