Part 3 The SEC is getting Serious

Whistle blower program

A question regarding the Whistle Blower Program was posed to the SEC on how they plan on analyzing the tips, complaints and referrals that they receive.  The SEC indicated that the Whistle Blower program is indeed underway, a new head of the department has been appointed and new rules should be announced next month.

The SEC indicated that it is essential each member firm’s compliance manual, include a program which covers Whistle blowers.  The SEC is stressing that employees and the Firm should rely on their own internal compliance programs to monitor improprieties.   

Tips complaints and referrals

James Capezutto indicated that market intelligence “is all about enhancing the information we

get”. The SEC indicated that in the past they were criticized that information was trapped in a divisional silo. Now there will be much more cooperation across divisions.

“As you could imagine, the SEC is receiving thousands of complaints from investors, employees and others”. They will review each tip, referral or compliant and will readily act on information that is believable and from a quality source. The SEC will cross check the information received from these tips, complaints and referrals with risk analytics they have collected on the company. 

Other information received

Enforcement will also look at the results of the examinations to determine whether to start an enforcement action and/or dive deeper into a fund.  And obviously someone on the inside of the company would be a quality tip which the SEC will take advantage of. 

Risk analytics

Bruce Karpati stated that the SEC is using a risk analytics approach as another factor in “assessing whether we should be approaching the firm for more information or to start an examination”.  Further, the risk analytics are being shared with exam staff prior to their arrival at the member firm.

The SEC also indicated that they will look closely at a firm where its performance is an outlier to that of the rest of the member firms. However they also indicated that they will not just rely on the 3% rule but use other sophisticated risk methods to determine if a firm is an outlier in its product and hedge fund class. 

Tomorrow I will wrap of this series with Valuations