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Compliance and Regulatory Services ('CARS') Hot Topics for March 2016

Mar 9, 2016

For this month, we thought we would mention a critical area of compliance that is often discussed by regulated entities, such as investment advisers, broker/dealers, and NFA registered members regarding how best to implement the difficult to define concept of a culture of compliance. The SEC, FINRA, CFTC all speak about the requirement of registrants to develop a strong tone at the top, or culture of compliance, which starts at the top of a firm and extends down to all levels and all employees.  A culture of compliance is developed over time through on-going communication and education. The culture is enhanced through the inculcation of the critical components of the regulated entities compliance requirements into employees job responsibilities, based on the particular employee’s role within the organization, and the associated level of regulatory risk that role presents.

What have we seen?

We have seen many of our clients take on this difficult task. They find it daunting because of the time consuming process of introducing and educating employees on what takes compliance professional years to learn themselves.  However, the one approach we have seen that has generated a level of enthusiasm at one  investment advisory client that is registered with the SEC, FINRA and the NFA, is to incentivize employees who take on the initiative of understanding the compliance procedures applicable to their specific job function and not just go through the mechanical motions of what the compliance officer has recommend be done to comply with firm procedures. They do this through the creative use of performance evaluations where the evaluation contains a section dedicated to compliance. The compliance section of the evaluation receives a weighting that impacts the employees overall evaluation that impacts compensation. Those employees who score high are monetarily rewarded, while a low compliance ranking can have the effect of reducing anticipated compensation.

This approach also works well with current  SEC thinking since it demonstrates the right tone at the top and correspondingly reduces senior management risk of failing to implement steps to develop a culture of compliance. It is also consistent with the theme of the Dodd Frank Wall Street Reform Act of impacting compensation based on performance.

What are the risks?

We are seeing more and more claims by regulators of registrants failing to develop a culture of compliance when routine inspections uncover compliance failures. In the past, it has been the SEC who has primarily made these claims that result in harsher action against the registrant. However, we are now seeing FINRA take on a similar tact. As part of a sweep review, FINRA has recently published a notice that they will meet with senior management, including compliance and legal, to determine how the firm has established the right compliance culture. In the notice, FINRA outlined eight items they will be interested in during sweep interviews. We note that one of the items is compensation. Establishing Communicating and Implementing Cultural Values.

Our Take: Previously FINRA-registered broker dealers were able to escape the claim of not fostering a strong culture of compliance since that objective was more suited for registered investment advisers who are subject to a fiduciary standard. It appears as though those unwritten walls have come down even though brokers are not yet subject to a fiduciary standard. FINRA seems to be moving closer to the SEC, both functionally and stylistically, in its examination of brokers.

SEC News

Feb. 25, 2016  Fee Rate Advisory #4 for Fiscal Year 2016
Feb. 18, 2016  VimpelCom to Pay $795 Million in Global Settlement for FCPA Violations
Feb. 17, 2016  Daniel Kahl Named as Chief Counsel of National Exam Program
Feb. 17, 2016  SEC Charges Biopesticide Company and Former Executive With Accounting Fraud
Feb. 17, 2016  SEC Announces Agenda for February 25 Meeting of the Advisory Committee on Small and Emerging Companies
Feb. 17, 2016  SEC: Deutsche Bank Analyst Issued Stock Rating Inconsistent With Personal View
Feb. 16, 2016  SEC: Tech Company Bribed Chinese Officials
Feb. 11, 2016   SEC: California Man Sold Investors Phony Stock to Pay Gambling Debts
Feb. 10, 2016  SEC Adopts Cross-Border Security-Based Swap Rules Regarding Activity in the U.S.
Feb. 9, 2016  SEC Names C. Dabney O’Riordan and Alka Patel as Associate Regional Directors in Los Angeles Office
Feb. 9, 2016  Monsanto Paying $80 Million Penalty for Accounting Violations
Feb. 5, 2016  SEC Charges Company Executive With Insider Trading
Feb. 4, 2016  SEC: Miami Firm Broke Anti-Money Laundering Protocols
Feb. 4, 2016  SEC Announces Advisory Committee on Small and Emerging Companies Members
Feb. 3, 2016  SEC Charges Lending Company and Brokerage Firm With Fraud
Feb. 3, 2016  SEC Names Jane Jarcho as Deputy Director of National Exam Program   
Feb. 2, 2016 SEC and FINRA to Hold Regional Compliance Outreach Programs for Broker-Dealers
Feb. 2, 2016 SEC Completes Muni-Underwriter Enforcement Sweep
Feb. 1, 2016 SEC Charges Software Company With FCPA Violations


Feb. 19, 2016 Chairman’s Address at SEC Speaks - “Beyond Disclosure at the SEC in 2016”
Feb.19,2016 Remarks atthe “SEC Speaks” Conference: What Lies Ahead? The SEC in 2016
Feb.19, 2016      The Falling Leaves of the Buttonwood Tree
Jan. 25, 2016 Directors Forum 2016 Keynote Address
Jan. 21, 2016 International Developments – Past, Present and Future


Feb. 26, 2016 FINRA Approves Enhanced Price Disclosure to Retail Investors in Fixed-Income Securities
Feb. 19, 2016 FINRA Bars Broker for Market Manipulation
Feb. 11, 2016 FINRA Bars Two Brokers for Fraudulent Sales of a Hedge Fund
Feb. 9, 2016 FINRA Warns High-Yield CD Offers Can Be Bait for High-Commission Investments 
Feb. 2, 2016 SEC and FINRA to Hold Regional Compliance Outreach Programs for Broker-Dealers

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