Chief compliance officer duties could have ethics added to list

NEW YORK — Ethics may soon be added to the list of responsibilities carried out by chief compliance officers at mutual fund companies.

But some industry experts debate whether CCOs are in the best position to address ethics questions or whether fund companies should create chief ethics officers.

"It appears there are two schools of thought on that," said Diane E. Ambler, a Washington-based partner with the law firm Kirkpatrick & Lockhart Nicholson Graham LLP, Pittsburgh.

"Compliance and ethics do work hand in hand, but they are different," said Ms. Ambler, a contributor to the Chicago-based American Bar Association's Fund Directors' Guidebook.

Compliance deals with rules and regulations, said Keith Darcy, acting executive director of the Ethics Officer Association in Waltham, Mass. Getting compliance officers to think about an abstract concept such as ethics may be difficult, he said.

That doesn't mean it can't be done, some industry experts say.

At an Investment Company Institute meeting in Palm Springs, Calif., last month, Hal Liebes, a New York-based CCO with AMVESCAP PLC of London, told an ethics panel that he was responsible for creating a forum for employees at his company to discuss ethical issues. AMVESCAP is the parent company of Houston-based fund manager AIM Management Group Inc.

Mr. Liebes said it is important to communicate that the rules employees are expected to follow create "the floor of behavior." Behaving ethically involves going beyond what the rules require, he added.

Kevin M. McGovern, a Boston-based partner with Deloitte & Touche LLP in New York, said he thinks CCOs such as Mr. Liebes are more than capable of handling ethics issues, a sentiment the industry appears to agree with.

"I have not seen a cropping up of chief ethics officers," he said.

It is an important issue to mutual fund companies because federal sentencing guidelines and statements from the Securities and Exchange Commission indicate that if a firm has a strong ethics program, regulators will take that into account if improprieties are uncovered, Ms. Ambler said.

"If you're a good guy and you're in trouble, then you're not necessarily as culpable as if the culture was one that turned a blind eye," she said.

But the question remains: What is the best way to build an ethical culture?

The SEC hasn't issued guidelines on the topic. The Sarbanes-Oxley Act of 2002 says merely that public companies need to have and disclose a code of ethics.

In an attempt to protect themselves, some companies have gone beyond what Sarbanes-Oxley required, and the mutual fund industry has noticed.

That is why Oliver Quinn, vice president of the business ethics and resolve office at Prudential Financial Inc., Newark, N.J., was invited to speak at the Washington-based ICI's conference.

He detailed the lengths to which his company goes to foster an ethical workplace, from holding seminars about ethics to creating a toll-free hotline allowing fund company employees to drop the dime confidentially on co-workers they suspect of acting unethically.

"We've tried to weave business ethics into our culture," Mr. Quinn said, adding that Prudential has had an ethics officer for about 10 years.

Of course, defining ethics can be tricky.

Mr. Quinn tried to explain in an e-mail interview how Prudential defines ethical behavior.

"We determine ethical conduct based on relevant laws, regulations, as well as company policies, values and principals," he wrote.

"For example, if the company wanted to enter into a business transaction that would be profitable, but it unfairly leverages a conflict of interest, consummating the transaction would violate our company values and principals," Mr. Quinn wrote.

Industry experts contend that it is difficult to say whether an ethics program similar to Prudential's would have prevented such problems as market timing or late trading in mutual funds. Mr. Quinn said that given the "level of inquiry going on in the industry," he isn't at liberty to discuss the issue.

Other industry experts, however, said mutual fund companies need not necessarily follow Prudential's lead.

Dov Seidman, founder, chairman and chief executive of LRN, a Los Angeles-based firm that helps companies create ethical corporate cultures, said he sees no problem with CCOs' adding ethics to the areas they oversee.

"Laws and the spirit of the laws go together," he said. "I don't believe there should be a separation of the two."

However, Mr. Seidman said, ethics shouldn't start with the CCO.

"Ethics can't be delegated," he said. "It's first and foremost about leadership from the top."

The mutual fund industry, which for a long time seemed to be obsessed with keeping to the letter of the law, appears to be waking up to that belief, Mr. Seidman said.

"One of the things they're noticing is that damage to reputation is financially very costly," he said. "Suddenly, it's become very practical to be principled."