SEC to come down hard on compliance

WASHINGTON — SEC examiners are poised to aggressively examine money management and mutual fund companies to determine if they complied with the Oct. 5 deadline for instituting stepped-up compliance practices, sources say.

The Securities and Exchange Commission's increased emphasis on compliance was announced well before the mutual fund trading scandal erupted a year ago, but took on greater importance during the past several months.

"The SEC has been saying for months that they expect firms to be in compliance on the mandatory compliance date. They will go in and commence inspections immediately," said Robert J. Zutz, partner in the Washington office of the law firm Kirkpatrick & Lockhart, and a former SEC official.

Thomas Harman, a partner in the Washington office of Morgan, Lewis & Bockius LLP and a former chief counsel of the SEC's division of investment management, concurred. "I expect the SEC staff will be in to visit some of the larger firms and advisers in October to see how they have complied with the rule."

SEC officials declined to comment. Instead, a spokesman referred to a speech by Lori A. Richards, director of the SEC's office of compliance and examinations. In that June 28 speech, Ms. Richards told independent mutual fund directors that "we at the SEC will not tolerate a perfunctory show of compliance. Strong words? Absolutely."

Because the new compliance rule is an anti-fraud regulation, Mari-Anne Pisarri, a partner in the Washington law firm of Pickard and Djinis LLP, worries that SEC examiners could hit firms for violations of anti-fraud statutes in addition to violations of securities laws.

"I just hope that calm, cool heads will prevail and they (the SEC examiners) are not seeing the industry as the enemy," Ms. Pisarri said. She noted her clients are "making a good-faith effort" but don't know what procedures will be deemed to be sufficient.

Under the new rule, money managers and mutual fund companies were required to have chief compliance officers on the payroll by Oct. 5

Many of the firms implicated in the mutual fund trading abuse scandal have made changes. Among them:

• Last week, the board of Evergreen Investments, Boston, approved the promotion of Jim Angelos to chief compliance officer. Mr. Angelos was previously director of compliance for both the Evergreen funds and fund distributor Evergreen Investment Management Services. Evergreen is an affiliate of Wachovia Bank, Charlotte, N.C. In August, the SEC informed Evergreen it intended to take enforcement action against the firm; Evergreen is disputing the SEC's contention that it deserves enforcement action.

• Putnam Investments Inc., Boston, established an internal compliance control committee to coordinate compliance issues at a senior level across the firm in early 2004. Tony Ruys de Perez was named chief compliance officer in March. Charles "Ed" Haldeman Jr., Putnam president and chief executive officer, also announced last month that the firm will make further disclosures to investors on items such as aggregate compensation for each mutual fund's management team and the money senior managers have in Putnam funds. Putnam was the first firm caught in the trading abuse scandal.

• Franklin Templeton Investments, San Mateo, Calif., established in early spring a compliance rule committee responsible for overseeing and coordinating its compliance efforts, spokeswoman Stacey Johnston said. The firm appointed James Davis as chief compliance officer; he had been director of global compliance. Franklin Templeton also was implicated in the trading probe.

• AllianceBernstein Institutional Investment Management, New York, established high-level ethics and compliance committees late last year, said company spokesman John Meyers. Executives also promoted Mark Manley to chief compliance officer; he had been a senior vice president in the legal department. AllianceBernstein has settled charges of market timing in some of its mutual funds.

Firms not connected to the trading probes also are ramping up their compliance procedures.

For example, JP Morgan Fleming Asset Management, New York, plans to create an infrastructure subcommittee responsible for identifying and addressing potential compliance and risk issues across all client services businesses by 2005. "I need to know that we have a tight control environment," said CEO Eve Guernsey.

Michael Rosen, investment consultant at Angeles Investment Advisors, Santa Monica, Calif., placed great importance on firms tightening control across a multitude of departments. "Big firms are well advised to consider oversight across all divisions because problems in one area can produce problems in another area," Mr. Rosen said.

But Ward Harris, consultant for the McHenry Group, Emeryville, Calif., questioned the need to establish new committees to mitigate risks. "It sounds hooey, or like someone is trying to pat themselves on the back. Good investment managers have been doing this for decades."

Meanwhile, companies that haven't amended their annual registration filings to note the designation of a chief compliance officer can expect a call from the SEC.

In addition, SEC officials will review compliance manuals, some sources warned.

Jeffrey Morton, a partner in the Morristown, N.J. office of Adviser Compliance Associates LLC, a compliance consultant and a former SEC examiner, suggests companies start publishing their compliance manuals on their websites.