I've recently been talking with investment advisers about their compliance practices. What's funny is that although none of them have any relation to each other, I picked up a pattern in the basic message that they were communicating to me.
Apparently, they have no issues with compliance. Somewhere in the "back room" there's a battalion of compliance experts incessantly combing through tombs of compliance books, regulations, standards, statements, advisories ... you get the idea. All this is diligently codified, and translated into bulletproof processes and super-systems that do not allow them to go out of compliance.
That's why I thought it was hilarious to come across a recent post by Wendy Fried at footnoted.org. Apparently, the SEC just issued a ComplianceAlert to SEC regulated companies including broker-dealers and investment advisers. According to Wendy ...
SEC examiners found some large broker-dealers to be surprisingly sloppy about verifying the values their trading desks assign to subprime mortgage-related products ...
... At certain unnamed broker-dealers, subprime securities held as collateral for financing transactions were “solely priced by proprietary traders and/or outside pricing services,” with zero oversight by the personnel who were supposedly overseeing these valuations. It’s rather troubling that, at a moment when dealers are presumably on high alert about the financial health of their counterparties, any firm would hold subprime-related collateral and not be totally anal-retentive about how it’s valued.
This does not surprise me a bit. Here's the real truth people.
If you do not have a system in place to tell you that your process is doing what you think your process is doing, it's probably not. When I investigate a company's process control, in almost every case, their "as-is" process has discrepancies, sometimes huge discrepancies, with their "really as-is" process.
If you're the Emperor, and you are being told your compliance is under control, look in the mirror before you decide to walk down the street.
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