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Richards Discusses Compliance Processes and Programs

Lori Richards, the director of the SEC's Office of Compliance Inspections and Examinations, recently reviewed the compliance process and shared some of the practices the staff has observed. In remarks to the National Society of Compliance Professionals, Richards also discussed the compliance issues on which the staff is currently focused, including insider trading and front-running, senior citizens, supervision and trading issues.

A culture of compliance, which Richards said relates to instilling in every employee the obligation to do what is right, is in the best interest of securities firms. The process of compliance is important because it will help firms avoid or detect violations and deal with them effectively. If the compliance process is institutionalized, Richards said that it will help guard against those who do not share the mission.

Richards urged firms to develop effective compliance programs absent a customer complaint, an arbitration with an aggrieved customer, a regulatory examination or an enforcement action. Compliance success should not be judged by whether a complaint has been lodged, she said. The staff spends its limited resources on firms with weak compliance structures, according to Richards. The staff's evaluation of a firm's culture of compliance is part of its risk assessment process that may determine how often the firm gets examined.

The staff has encountered firms that make it clear that all employees are expected to operate ethically and consistent with fiduciary and legal obligations, Richard said. Some firms' chief compliance officers provide regular reports to the board or the audit committee. At some firms, the CEOs speak frequently about the compliance culture and make clear that the decision-making process is guided by that philosophy, she said. One of the best ways to demonstrate the culture of compliance is to make decisions that demonstrate an intolerance for noncompliance, she added, even if it means losing a trade, a client or a deal.

Firms are adopting new and more thoughtful policies and procedures to prevent and detect violations, according to Richards. The most important test is whether they are effective in detecting, reducing and correcting compliance problems, she said. Firms also must have a sound system for delegating responsibilities for the compliance program. Richards noted that some firms incorporate compliance in employee and supervisory evaluations as a factor in determining compensation.

Many firms use automated systems to identify, monitor, report and document compliance risk, Richards observed. She suggested that many firms need to provide more resources to the technology for detecting problems. Some firms use internal auditors, establish internal hotlines and train supervisors to be open to hearing bad news, she said. Richards acknowledged that many firms struggle with how to measure the success of their compliance programs. Measuring outcomes is one method, she said, including the reduction or elimination of violations. Firms may also measure the occurrence of new problems, she said.

The SEC's examiners are looking for insider trading and front-running by advisers, broker-dealers, hedge funds, clearing agencies and transfer agents, Richards reported. She urged firms to include these issues in their risk assessment, investigation and monitoring functions. She suggested that firms be alert to payments to affiliates and make sure they are appropriate. If a firm does business with seniors, Richards said to be certain it complies with applicable fiduciary and ethical principles and with suitability and disclosure standards.

The staff will look at how firms are supervising their employees, particularly at branch offices and on trading desks, according to Richards. The staff will also examine best execution, payment for order flow, soft dollars, compliance with Regulation SHO and mark-ups, she added. Additional areas of focus include controls to prevent theft and misrepresentations and anti-money laundering programs, she said.