Compass Compliance Services, LLC Michelle Kennedy SEC Compliance Reviews

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Actions that can confirm client claims of trade orders or uncover bogus ones Published on: 1/19/2009

An investor tells IA Week he twice instructed his adviser to pull his funds out of the market. The adviser allegedly ignored the requests and the client suffered huge losses. Sound familiar? Complaints like this naturally go up in a down market. Sometimes the protestations will be legitimate; other times they're fake - an attempt to squeeze some cash from the adviser. What begins as an internal complaint can lead to a regulator - or a courthouse. "It always takes some time for lawsuits to catch up ... [with] massive losses," says Ethan Cohen, partner with Schiff Hardin in Atlanta. "I think we're going to get into a situation where people may be claiming, as fiduciaries, investment advisers should have predicted this was going to happen." Before problems progress that far, take some actions to reduce the risks. One of the most common techniques is to request changes to one's portfolio be done only in writing. A few weeks ago, Michelle Kennedy, consultant with Compass Compliance Services in Greenwood, S.C., helped a firm shift to this type of policy in response to clients contesting adviser actions. She urges firms to have the trade desk mark tickets as "non-discretion." The best strategy is to adopt a policy that requires confirmation of the order and some type of follow up, says Cynthia Stamer with Glast Phillips & Murray in Dallas.

Key documentation

Advertise your policy in multiple ways: your contract, engagement letter, monthly or quarterly mailings and other correspondence; even your voicemail. One North Carolina adviser says his firm attempts to send the confirmation to the client within 24 hours and places the responsibility on the investor to alert the firm if the correspondence doesn't accurately reflect the client's wishes. The letter the adviser sends clients at Ameriprise Financial Services is called a "summary letter," says Kurt Lofgren, VP and CCO of U.S Retail Distribution in Minneapolis. Ameriprise hasn't seen a spike in such customer complaints, he says, but rather generic suitability claims. Advisers may warn the investor of the risk of "bottom selling" and buying into a rising market, but "if a client unequivocally tells us to sell a security, at the end of the day we will sell that security," he says. He counsels his staff to document the advice and the conversation and capsulate it into the summary letter. Documentation is smart because you may well get an opposite claim from a client - after the market rebounds - questioning why he was taken out of a rising security. When Ameriprise gets a complaint, the firm's investigations group examines the adviser's notes and records of the client's calls and the adviser's trading patterns. It also will interview the adviser, the client and the adviser's supervisor "and then we'd make a decision as to whether to recompense that client," says Lofgren.

Recorded lines

"If they want to take a call like that [client orders] on an unrecorded line, they need to get it confirmed in writing by e-mail, texting or something," says Margaret Paradis, partner at Baker & McKenzie in New York BCG Securities in Delran, N.J., recently invested in a voice-over Internet product that can record targeted calls or all calls, says CEO Bob Paglione. All calls involving traders are recorded. If necessary, the firm "can even play [the call] back for" the client," he says. "The conversation improves because [the brokers] know they're being recorded." BCG went with Alteva, which can work with your existing telephone system or replace it, says CEO William Bumbernick in Philadelphia. It permits searches by the recorded audio and written notes. The costs range from $25-$50 per line per month. Short of going this route, you could always ask a client to produce phone records. The real solution comes down to communications. "People will start complaining about a lack of communications from their rep," says Steve Candela, a consultant with SEC Compliance Consultants in Philadelphia, who has 33 years in the business. "This always precedes an increase in people complaining about their account instructions not being followed." "If you speak to a client once a year, speak to the client three times a year in this market," says Lofgren. "You might not have all the answers but now is the time to listen" to them. Got a comment about this story?

More regulations, a growling regulator and other big changes likely in 2009 Published on: 1/5/2009

Let's acknowledge upfront the difficulty in forecasting the year ahead - given the spectacular surprises 2008 unleashed, ones that would have defied prediction one year ago. As you may expect, the events of the last few months weigh heavily in prognosticating 2009. The list tops off with predictions of new regulations for the financial services industry; no surprise given recent events and an eager new administration. Hedge funds will likely be an initial target, with many envisaging mandatory registration of hedge fund advisers. New ERISA rules and a further clampdown on shorting are also likely. "Advisers really should keep an eye on short selling activity," says Giselle Casella, VP and head of Global Core Advisory Compliance at Deutsche Asset Management in New York. "I think that's going to be a real hot button issue for 2009." Here are more predictions - along with actions you can take to be ready:
A new attitude at the SEC. This is a given with Mary Schapiro likely becoming the next chairman. An agency badly burned by the alleged Bernard Madoff scam will likely move quickly to set a new tone. Look for more intense exams, an increase in sweeps and perhaps less assistance from the agency on how to master inspections, says Michelle Kennedy of Compass Compliance Services in Greenville, S.C. Don't be surprised if there's a major internal shuffle, too, says Terrance O'Malley, partner at Fried Frank Harris in New York. He could foresee OCIE being disbanded, scattering IA inspectors to the Division of Investment Management and broker-dealer examiners to the Division of Trading and Markets. Fiercer exams will translate into less attention to issues such as best execution. Instead, examiners will train on financials, O'Malley adds. "I have no doubt the SEC's going to take a hard look at" this, he says. Congress could opt for a more radical approach: Combining the SEC with the Commodity Futures Trading Commission, or creating an entirely new entity. "The Bernie Madoff scenario could possibly be another chink in the armor that leads to the disintegration of the SEC," offers Keith Marks, partner with Ascendant Compliance Management in Salisbury, Conn. One possible result could be an SRO for IAs, he adds. The Madoff fallout likely will lead the SEC - or whomever - to take a hard look at the custody rule, continues O'Malley. A panel could be appointed to search for better ways to protect investors' assets because the current rules "didn't work in the Madoff case." He also thinks the SEC this year will kill plans to revise Form ADV, Part II. Look for more international cooperation among regulators, says Margaret Paradis, a partner with Baker & McKenzie in New York. "The current crisis is global in nature. It has shown how interconnected markets are," she adds, so regulators may respond with greater reciprocity.
Fewer hedge funds and more demanding clients. Hedge fund assets will continue to drop significantly, perhaps by 50%, drained by market losses and redemption calls, predicts Robert Leonard, a partner at Bingham McCutchen in New York. He spots a ray of sunlight in the latter part of the year. "I think by the third quarter you'll see some funds starting up of decent size" because "good money always wants to find good managers." Edgy clients will expect more transparency and new investment strategies. "They're going to be pounding the table saying 'show me'" how solid your operational platforms are and how compliant you are, believes Tony Turner, principal at Financial Tracking in Greenwich, Conn. "The public's going to get a little scared of the old philosophy of buying and holding" securities for the long term, says Steve Candela, a consultant with SEC Compliance Consultants in Philadelphia. He fears, if this happens, the market's "volatility is just going to go through the roof and eventually it's going to have a negative impact." Advisers should expect to do a lot more hand-holding of clients, active account managing and friendly persuasion to steer them away from the natural tendency to liquidate or move assets. "Managers are going to have to work hard to counter that dynamic," says Matthew Eisenberg, partner with Finn Dixon & Herling in Stamford, Conn.
Continued market turmoil. Of course, this is the trillion-dollar question: when will the market and the economy turn around? Bingham's Leonard is optimistic for the latter part of this year. Others peer into 2010. "I feel we're going to see further deterioration in revenues and margins in financial advisory firms in '09," says David Goad, president of Succession Planning Consultants in Newport Beach, Calif. He believes 2010 will bring the turnaround. The market may come back this year - it traditionally precedes the larger economy's rebound - but 2010 may produce "a pretty good recovery," predicts Albert Kyle, Smith Chair Professor of finance at the University of Maryland in College Park. That's when the housing industry will likely bottom out, he says. Kyle remains concerned that the costs of the bailout of Fannie Mae and Freddie Mac may far exceed what has been announced by the government.

Your e-mail vendor should store your retention preferences Published on: 10/6/2008

If your firm pays a vendor to store its records of e-mails and other electronic correspondence, be sure the vendor understands your responsibilities under the SEC's rules, suggested Jennifer Sawin, senior special counsel in the Division of Investment Management at IA Week/IA Watch's IA Compliance Fall Conference in Philadelphia last month. The vendor must understand your firm's legal obligations "because ultimately you're the one on the hook," she said. While she noted that "e-mails have played a big role in a large number of [enforcement] cases," the Commission's record-retention rules are technology neutral - affecting paper, too. The SEC actually has legal authority to look at all records maintained at a firm, she added. Before your firm attempts to go paperless, though, by perhaps hiring a vendor to scan its documents, make sure you and the vendor first agree on a naming convention for the documents, suggested Ann Oglanian, president and CEO of ReGroup in San Francisco. She related a story of how a firm didn't follow this advice and got back a product that was virtually useless. The panel also provided these tips:
Destroy records in a safe manner. But also be sure your vendor knows your requirements for keeping or destroying records. You don't want to discover an old tape you needed from the vendor had been erased.
Alert your staff that their company e-mails are not private.
Add to your Bloomberg contract a requirement that it each day download to your storage vendor your firm's daily Bloomberg IMs.
If you work at an international firm, change your policy to keep records for the longest period that a government in your jurisdiction requires.
Don't be shy about replying to a string of controversial e-mails that staff should take the discussion off line. Editor's Note: Hear more about your responsibilities regarding e-records by registering for IA Week's webinar, E-Correspondence: A Guide to Your Responsibilities Governing E-mails, Social Networking and Instant Messaging, Tuesday, Nov. 18, 2008 from 2-3:30 p.m. ET Sign up at http://www.iawatch.com/conferences/A1675/home.html or call 800-260-1545. Got a comment about this story? E-mail us. The information contained herein was current as of the publication date.

Fix what you find in your reviews If you find something in your quarterly or annual reviews, "fix it and don't let it happen again," advised Michelle Kennedy, VP of Wealthtrust and director of Compliance Platform Services. She made her comments at IA Week/IA Watch's IA Compliance Fall Conference in Philadelphia last month. She also shared some best practices. For instance, drill down to your top 10 trades for a given period and confirm they're hunky-dory. "That's something everybody should be looking at these days," she said. And monitor trades bought and sold within a short time. Enforce trading blackout periods, even for those individuals who have access only to research information, suggested Giselle Casella, VP, Head of Global Core Advisory Compliance, Deutsche Asset Management in New York. She also urged that you expand your code of ethics to define related accounts to include employee spouses, minor children and anyone who lives with them. All of these people "should also be reporting under the code of ethics."