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Thursday, September 19, 2013

NICSA Regulatory Update: SEC Enforcer Talks Priorities

Reported by Tommy Fernandez

Whenever regulator Kevin Kelcourse sends memos to his colleagues in the SEC about possible enforcement actions against a fund firm, he always gets questions about the fund's board of directors.

"Every single case I have sent down, the first question from the Investment Division has always been "Where was the board?" said Kelcourse, who is assistant director in the asset management unit of the SEC's enforcement division, working out of the regulator's Boston office.

Kelcourse was speaking during a breakout session, focusing on Regulatory Updates, held during the NICSA General Membership Meeting held September 19 to 20 in Boston at the Hyatt Regency.

The unit is experiencing a gradual shift in focuses given that SEC cases related to the 2008 Financial Crisis are starting to wind down, according to Kelcourse. This is giving regulators more time to focus on other issues.

For example, even though board behavior scrutiny has been big since the crisis, it is only going to grow more so, said Kelcourse.

However, he said, "that doesn't mean we are looking to sue every board in the U.S. We are not going to do that. That is not the idea. We are looking at what the boards are doing right, what they are doing wrong. Depending on how wrong [that behavior] is, we will look at enforcement actions."

Good boards, Kelcourse said, are engaged, asking the tough questions, meeting regularly enough and long enough to cover all the ground they need to cover. They do not take what their advisors are saying for granted.

Bad boards, he said, rush to get an umbrella when their advisors saying it is raining.

That doesn't mean that directors face peril with just a single error. The key is regular questioning, a consistent process, he said.

"I think from my own perspective, the line for board members can be set too, too high. If every mistake you make subjects you to an enforcement action, I don't know about you, I am not going to serve on that board," he said.

It's the boards that have continuous errors, regular slip-ups that cause alarm amongst enforcers, Kelcourse said.

"If there is no pushback, then there is the murkiness, are you doing enough to push back?" he said.

Other priorities going forward for the asset management unit will include issues on valuation of performance, scrutiny into mutual fund fees, as well as all things related to compliance, such as whether chief compliance officers have the clout and resources they need to do their jobs.

Kelcourse worried that firms may be increasingly tempted to cut compliance operations in order to cut expenses.

"What do you do when you are squeezed? You cut overhead,...Compliance is not something to cut," he said.

Another issue that Kelcourse and his colleagues have been focusing on, and will continue to do so, is the murk area of omnibus accounts.

"I can't tell you the number of times I have asked my staff, who are the investors [impacted in a case]? Is it institutional, retail, and the response I often get is, 'Well, we don't know.' 'How do you not know,' I ask, already knowing full well the answer. It is because they are omnibus accounts and they can't see through," he said.

Fees are getting increasingly scrutinized by SEC staff, Kelcourse said, for example whether differing fees across different channels impact resource allocation as well as strategic and investing decisions. For example, when an advisor manages a strategy across a mutual, an SMA and a hedge fund, do the different fees affect what the manager does with each of the accounts.

Kelcourse said that fundsters should expect more Wells notices against third-party vendors who don't do enough on the compliance front.

Do SEC enforcers look harder at firms that have made mistakes in the past? he had this answer: "We look at everything with a fresh perspective, but if we have a repeat customer, there will be more skepticism."

Finally, Kelcourse said that the SEC will devote more attention to the roles individuals play in particular cases.

"We are taking a hard look at individuals. We always have, but it will be harder to see cases going forward over the next the years that don't include individuals," he said.  

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