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Regulatory Compliance Management Software Solutions

Opinion Article

Are you caught up in the rumors?

By Tim Kennedy

Psst -- have you heard? Regulators have begun examining how firms comply with rules that prohibit the intentional spread of rumors intended to manipulate securities prices. This is the latest example of how compliance teams are being challenged to manage a growing list of compliance activities, often with the same headcount.

The SEC's Office of Compliance Inspections and Examinations (OCIE), NYSE Regulation, Inc. and the Financial Industry Regulatory Authority (FINRA) are conducting the exams. OCIE will conduct exams of buy side firms - hedge funds, mutual funds and asset managers. The exams evaluate a firms compliance with SEC Rule 10b-5, NYSE Rule 435(5) and NASD Rule 5120(e) that prohibit the circulation of false or misleading rumors that may influence market conditions. Regulators determine if a firm is in compliance with these rules based on the compliance controls a firm has in place and whether they are "reasonably designed." Specifically,

• Whether a firm has policies and procedures requiring sales and trading personnel to report instances of misleading rumors being circulated.
• The status of activities such as investigations, follow up actions and internal discipline related to misleading rumors.
• A firms ability to produce copies of all training materials and policies pertaining to NYSE Rule 435(5), NASD Rule 5120(e) and SEC Rule 10b-5.
• Whether software that searches for specific subjects, topics and names is used to combat misleading rumors.

Responding in a timely manner to requests for documentation is also critical - 50 firms subpoenaed by the SEC were given two weeks to produce all requested documentation. Failure to do so can result in fines while violating the laws prohibiting false and misleading rumors is subject to civil and criminal prosecution.

Regulators understand that a CCO can't eliminate every rumor at the firm - that's why the exams focus on the nature of the compliance controls designed to prevent the spread of rumors and how they work. To pass muster with regulators, the CCO must demonstrate that the firm has rigorous compliance controls, and a process in place to enforce and monitor them in a timely manner. An effective process must provide the CCO with complete visibility and real-time management of all the firms compliance activities including personal trading approvals, code of ethics attestations, outside interest monitoring and the circulation of rumors.

The exams related to rumors are part of the trend toward greater regulatory oversight of hedge funds. This will increase the number of activities a compliance team must manage and prompt firms to re-evaluate their approach to managing their compliance process. Most firms build their compliance process around general business tools such as Outlook, Word, Excel, folders, shared drives, and local drives. However this approach does not produce an effective compliance process because:

• The CCO does not have a complete view of the firms compliance activities since information is scattered across multiple systems.
• The status of compliance activities is not current because they're not updated in real-time.
• It's not a scalable or efficient way to manage the growing list of compliance activities.

A CCO needs a compliance platform to build an effective compliance process. Compliance platforms from firms such as MyComplianceOffice delivers complete visibility of a firms compliance activities, generate real-time updates, and enable the compliance team to keep pace with the growth of the regulatory environment. That's no rumor.

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