SEC Commissioner Aguilar's Speech on the Importance of Investment Advisers' Developing a Robust Culture of Compliance (with Lofchie Comment)

SEC Commissioner Luis A. Aguilar gave a speech at the Regulatory Compliance Association's 2013 program on Regulation, Operations, and Compliance which focused on training and education for the investment industry in general and alternative asset management firms in particular.

Commissioner Aguilar said that, although surveys indicate that investors generally trust their financial advisers, investors' opportunities for mischief increase as the industry grows in size and complexity. He also said that, in 2012, 147 investment adviser-related charges had been brought by the SEC, the largest category of enforcement cases that year. He also emphasized a recent SEC study showing widespread failures to comply with the SEC's custody rule. (See news item: SEC Issues Risk Alert and Investor Bulletin on Investment Adviser Custody Rule; Summarizes Rule and Recent Violations (with Lofchie Comment.) Among the other areas of concern that he highlighted were insider trading, conflicts of interest and valuations. He also said that the SEC was looking at the development of best practices in areas such as the detection of unauthorized trading and the use of social media.

According to Commissioner Aguilar, these statistics are indicative of the need for strong compliance programs to maintain investor trust. Commissioner Aguilar believes that senior leadership must advocate for a robust culture of compliance and ensure that management provides the necessary tools and resources to fulfill their compliance functions, such as hiring the right people, developing effective controls, and designing appropriate policies and procedures that take into account the firm's fiduciary obligations to its clients.

Lofchie Comment: I found it surprising he said that the largest category of enforcement actions were those brought against investment advisers. While it is, of course, a good thing to comply with all rules, some rules are more important than others, and Commissioner Aguilar singles out some of the most important ones; e.g., custody and valuation (to these, I might add trade allocation). Firms hit by violations in these areas are going to have a hard time explaining them away to potential investors, so it makes sense to get these areas right and well documented.

See: Doing the Right Thing: Compliance That Works for Investors.
For a compilation of recent news items in this area, see Current Topics - Investment Advisers Regulation (Norm Champ's speeches highlight some of the SEC's recent areas of "interest").