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navigating the financial crisis


Good Compliance

Last October, the College of Law hosted its third annual Securities Regulation Conference in Portland, which brought together an unparalleled group of business law and securities experts from across the country. Participants included six current and former U.S. Securities and Exchange Commission officials, including two former SEC general counsels, and top securities regulators for Oregon, Washington, Idaho and British Columbia. Leading West Coast securities attorneys and business law scholars from Willamette rounded out the four panel discussions. Lori A. Richards, director of the SEC’s Office of Compliance Inspections and Examinations, presented a rousing keynote address on the importance of incentivizing compliance, a condensed version of which is presented below. Note that the views expressed in her address are her own and do not necessarily represent the views of the SEC or any other member of the staff.

The SEC’s Office of Compliance Inspections and Examinations is responsible for examining securities firms — advisers, funds, broker-dealers, self-regulator organizations, transfer agents — for compliance with the law. The examination program is comprised of more than 800 examiners, accountants and lawyers across the country. Our job is to conduct examinations to identify compliance weaknesses, deficiencies and violations at SEC-registered firms. An important function of examinations is to identify weaknesses in compliance and other internal controls that could allow fraud and other types of violations to occur down the road, as well as to encourage and ensure that firms beef up their internal controls. As you might expect, as an examiner my perspective on securities regulation is an acutely practical one. I see every day the way that securities firms go about implementing the securities laws. I see what works and what does not work in practice. So it is this quite functional, non-theoretical perspective that forms my views. Incentivizing compliance is an issue that I have been thinking about during the past year, as we’ve all witnessed compliance breakdowns and failures of various types. Among others, these include the

16 | Willamette Lawyer

SEC charging Bank of America Investment Services with allegedly failing to disclose to clients that it favored two of its proprietary mutual funds when it made investments for its wrap fee clients and accusing Bear Stearns hedge fund managers with allegedly fraudulently misleading investors about the funds’ holdings. As I look back on these and other alleged compliance failures, to me, they reinforce the necessity of organizations having front-end compliance systems that would prevent similar problems from occurring. In any good organization, when things go wrong at the firm or at another firm in the industry people dissect those incidents, asking, “How was this possible?” The Frank Gruttadauria matter is a case in point. He was the registered representative in Ohio who diverted his customers’ account statements to his own post office box and sent his customers inflated account balances on fake account statements thereby perpetuating a massive fraud. This incident led to an appreciation of the value of protections over customer changes of address, wire transfers and account statements, and improvements in controls across the industry. It is a perfect example of how compliance breakdowns can lead to strengthened compliance controls.

Willamette Lawyer | Spring 2009 • Vol. IX, No. 1  

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