Culture of Compliance

As my Compliance career has progressed, I’ve noticed a few recurring themes like, we sure could use more Analysts and there must be better a better way. While that may be the same sentiment in other industries; a recent survey by Cipperman Compliance Services (“CCS”) indicates that my assumptions were correct. They found that the compliance function in the surveyed firms tended to be underfunded and understaffed. Their survey included asset managers, broker-dealers, alternatives managers and wealth managers.

A number of findings, while no surprise at all, were a little troubling including, 74% of respondents (responsible for compliance duties) believed that their firms should commit more resources to the compliance function and 83% of broker-dealers and 58% of asset managers said they needed to focus more resources on compliance.

Compliance is your level of protection for your Clients, the Advisors and for the firm itself. According to the old adage, “the best defense is a good offense” and I tend to agree. When compliance is understaffed and/or underfunded, the process becomes reactionary or defensive, with only the resources to respond to issues as they arise rather than taking the offensive and trying to uncover weaknesses in the system before there are problems.

So what kind of commitment to compliance would be adequate? Todd Cipperman the Chief Executive Officer of CCS says, “Firms should spend a minimum of 5% of revenues or 2 bps of assets under management on the compliance function. Investing in compliance protects the franchise and preserves assets under management. We view compliance as the firm’s defense. And defense wins championships.” I couldn’t agree more.

Please click here to read the full story.

Trust - How would you handle a net capital issue?

Trust, an essential element in the relationship between financial Representatives , the public and the regulators is delicate and must be nurtured over time . . . and it can be lost in an instant.

That’s what Charles “Chuck” Moore and Crucible Capital Group learned on August 8, 2014 when the SEC announced charges against the New York brokerage firm and its founder for allegedly violating the net capital requirements and subsequently falsifying books and records to conceal the deficiencies. The uniform net capital rule was created by the U.S. Securities and Exchange Commission ("SEC") in 1975 to regulate directly the ability of broker-dealers to meet their financial obligations to customers and other creditors.

The rule requires those firms to value their securities at market prices and to apply to those values a haircut (i.e., a discount) based on each security's risk characteristics. The haircut values of securities are used to compute the liquidation value of a broker-dealer's assets to determine whether the broker-dealer holds enough liquid assets to pay all its non-subordinated liabilities and to still retain a "cushion" of required liquid assets (i.e., the "net capital" requirement) to ensure payment of all obligations owed to customers if there is a delay in liquidating the assets.

“The net capital rule is a principal tool by which the SEC monitors the financial health of brokerage firms,” said Amelia A. Cottrell, an associate director in the SEC’s New York Regional Office. “It is therefore crucial that SEC examiners have prompt access to accurate and complete information about a firm’s financial condition.” It would be fair to say that most companies face financial challenges at some point. How firms deal with these challenges can either build or destroy trust. The charges allege that Charles “Chuck” Moore and Crucible Capital Group attempted to disguise the firm’s extensive and repeated net capital insufficiencies by improperly off-loading its liabilities onto the books of an affiliated firm and improperly treating non-marketable stock as an allowable asset.

Apparently Crucible entered into an expense-sharing agreement with another firm owned by Moore called Angelic Holdings. Angelic contracted to pay Crucible’s expenses. The vendors of Crucible were to bill Angelic for services they performed for Crucible. Moore provided SEC examiners with copies of invoices that had been doctored to eliminate significant past due amounts. The SEC examiners and investigators noted the falsifications. They also found that Angelic did not have the resources to pay the debts of vendors making the expense sharing agreement illegitimate. The case has been referred to criminal authorities for prosecution. Click here to read the SEC Press Release.

If you would prefer to focus your attention on your clients and the day-to-day operation of your firm, Red Oak Compliance Solutions is here to help with any or all of your compliance requirements.

FINRA Fines Heating Up

Summer temperatures in Texas are heating up almost as fast as the Financial Industry Regulatory Authority’s (FINRA’s) monthly “Disciplinary and Other FINRA Actions” publication. Reported recently by ThinkAdvisor.com citing an analysis by the law firm Sutherland Asbill & Brennan (Sutherland), FINRA is on track to assessing 49% more in fines this year than last year’s $57 million.

The first half of 2014 has already seen fines totaling $42.4 million compared with $23 million during the first half of 2013. At the current rate, fines in 2014 will total approximately $85 million which is still lower than the $111 million reported by FINRA in 2006. The Sutherland study also noted that FINRA “appears to be repositioning itself as its actions shift from cases relating to the financial crisis to more technical issues,” such as books and records and trade reporting violations.

Issues drawing the most heat so far this year are:

• Books and Records: $13.7 million in fines, 61 cases
• Anti-Money Laundering: $11.3 million in fines, 17 cases
• Net Capital: $9.7 million in fines, 18 cases
• Unregistered Securities: $9.2 million in fines, 11 cases
• Trade Reporting: $6.7 million in fines, 92 cases

One reason noted by Sutherland for the higher total is that fines themselves have been higher in 2014 than 2013. During the first half of 2013 there were only two fines of $1 million or more totaling $2.3 million. So far this year there have been five fines totaling $20.4 million. One anti-money laundering compliance failure case involving penny stock transactions resulted in an $8 million fine.

The study by Sutherland also found that as fines are heating up, disciplinary actions are cooling off . . . slightly. Fines are up 49% so far this year and disciplinary actions are down about 7% with 558 actions during the first half of this year (597 during first half of 2013). Please click here to ready the full article.

While there is not much we can do about the temperature, Red Oak stands ready to help you and your firm keep your cool year round.