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Funds News

COMPLY: SEC wants CEOs to talk compliance

* SEC talking to CEO in routine securities firm exams

* Discussions with CEOs can empower compliance officers

* Strategy makes CEOs more accountable for procedures

Oct 14 (Reuters) - Chief executives and top managers will be seen more on the front lines when Securities and Exchange Commission representatives show up in brokerage offices for exams and tests.

The Securities and Exchange Commission say they are involving the higher ups as a way to get more respect for chief compliance officers.

To start with, the agency is changing the way it handles its routine compliance exams by requiring the involvement of securities firm executives so they cannot leave the details entirely to compliance officers.

Top managers recently began meeting with SEC examiners to answer questions during regular onsite visits, Kevin Goodman, associate regional director of examinations in the SEC’s Denver office, told Reuters. Those meetings will continue to be a regular part of exams, he said.

This is a departure from past practice, when chief compliance officers were typically the agency’s main contact points during examinations. It was the role of compliance officers to field any questions and arrange meetings with higher-ups when needed.

For other executives, preparing to speak with regulators about these issues should help reinforce a firm’s compliance culture at the highest level of management, Goodman said.

“The process encourages executives to really listen to what the CCO needs to carry out an effective risk and compliance program,” Goodman said. Agency examiners will also ask executives about risk management practices, he said.

The change could help bolster the role of compliance officers. Compliance experts say that in some firms, the head of compliance has the executive title, but not the authority or support from top executives to carry out the many policies and procedures that regulators require.

In the worst cases, top executives might ignore or even fire the compliance officer for alerting them to a problem the firm needs to address, compliance professionals say. Among the thornier issues compliance professionals say could lead to retaliation against a CCO are reporting that an executive is running a lucrative outside business without the firm’s permission, or recommending termination of a top-producing broker who routinely sells unsuitable investments to clients.

Requiring chief executives to participate in routine SEC examinations “makes them more accountable,” says Guy Talarico, Founder and Chief Executive Officer of Alaric Compliance Services LLC, a New York-based consulting firm. “You don’t want the entire burden falling on the shoulders of the CCO.”

Routine SEC examinations don’t happen frequently. Examiners visit each of the nearly 11,000 investment advisers registered with the agency about once every 11 years, according to a recent SEC study. But that doesn’t diminish the seriousness of the process when examiners actually do arrive.

In the past, the SEC could talk to a chief executive, but often did not unless they had a special reason -- clarifying something a CEO said for example -- ostensibly sending the message that CEOs weren’t on the hook for a firm’s compliance culture.

Preparing for the questions examiners may ask helps engage senior management in a firm’s overall compliance process, says Lori Richards, former director of the SEC’s Office of Compliance Inspections and Examinations. Prepping for a broad question about how the firm meets its fiduciary obligations could help focus an executive on a firm’s potential conflicts of interest and how they’re disclosed to investors, she said.

Richards, based on her experiences, doesn’t expect the meetings to resemble a hard-core investigation or drag on all day. A 90-minute conversation is probably what executives can expect, said Richards, now a principal at PricewaterhouseCoopers LLC in Washington, D.C.

And simply speaking in broad terms about compliance won’t be enough to satisfy examiners, she said. An effective compliance program “will have to exist in reality,” for examiners to walk away satisfied, she said.

The new emphasis on executive input doesn’t mean the agency is out to get executives, said Goodman.

“Executives are not expected to know every detail, but examiners will be considering whether they’re actively involved in compliance and risk management,” said Goodman.

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