Compliance and the Securities Industry

As the compliance officer for Parsec, it is apparent to me that the compliance officers for Madoff were not doing their job. In 2006 the SEC required every securities firm to name a specific person as Chief Compliance Officer. The CCO is required to monitor the firm’s activities and ensure that the business is complying with the various securities regulations.

We have a software system that monitors all e-mails sent and received by employees which are then archived for record-keeping purposes. We are not allowed to electronically send personal client information which would include social security numbers, date-of-birth, account numbers, etc. The software alerts us to suspect e-mails.

Employee trades are carefully monitored and must be pre-approved before any trades are made. Employees must wait until block trades are finished for clients before executing any trades in their own accounts. Parsec receives statements on all employee accounts, including household members, and trades are double-checked each quarter to ensure compliance.

Portfolios are given specific composites (growth, growth and income or balanced, for example) based on the client’s investment objective, and then must be diversified according to guidelines established by our Investment Policy Committee. Sample portfolios from each advisor are reviewed periodically for compliance. If the portfolio is out-of-balance, the advisor is given a certain timeframe to get the portfolio back in compliance. We screen for stocks that are over a 5% weighting and if there is a reason for the overweight position it must be documented in the client’s electronic data file.

All advertisements and correspondence sent to more than one client must be reviewed and approved and a file is kept on all of those items. If we give statistics or certain facts we must have documentation on file to prove those facts. We also must retain records such as trade confirmations and account statements in order to be able to substantiate the performance figures sent to our clients.

Many other areas are routinely checked and a year-end compliance report is a requirement with documentation and “work papers” on the various testing procedures during the year included. I have attended compliance conferences every year and Parsec also retains a compliance consulting firm. We take this matter seriously and we maintain a culture of compliance. If a Ponzi scheme was going on at Madoff Securities and the compliance officer was unaware, he was a compliance officer in name only.

 

 

Barbara Gray, CFP

Partner

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