|P.O. Box 15021
Albany, NY 12212-5021
(1021 Watervliet Shaker Rd., Albany 12205)
| Christiane Gigi Hyland
Senior Vice President,
800-253-0053, ext. 3803
Fax: (518) 292-3755
VIA E-MAIL: firstname.lastname@example.org
April 10, 2003
Jonathan G. Katz
Secretary, Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Re: File No. S7-03-03
Compliance Programs of Investment Companies and Investment Advisers
Dear Mr. Katz:
Empire Corporate FCU appreciates the opportunity to comment on the Securities and Exchange Commission's (Commission) proposed rule pertaining to the compliance programs of investment companies and investment advisers.
The Commission is seeking comment on its proposed rule that would require each registered investment company and investment adviser to adopt and implement policies and procedures to prevent violation of the federal securities laws, review those same policies and procedures annually and appoint a chief compliance officer to be responsible for administering those policies and procedures. The Commission is also seeking comment on alternative ways to involve the private sector in enhancing compliance with the federal securities laws.
Empire is proud to count as members over 1,000 credit unions. MemberTrade Advisory Services (MTAS) is a wholly owned subsidiary of Empire, has over $25 million in assets under management and is currently registered with the Commission. Empire and MTAS commend the Commission's efforts to enhance the rules governing the compliance programs of investment companies and investment advisers. In general, Empire is supportive of efforts to protect investors and establish regulations to prevent and detect violations of the federal securities laws.
In this proposal, the Commission seeks comment on several issues: adoption and implementation of policies and procedures, annual review, chief compliance officer, recordkeeping and alternative/further private sector involvement. Since MTAS is an investment adviser and not an investment company, Empire's comments will be tailored more towards investment advisers. Empire's specific comments in these areas appear below.
ADOPTION AND IMPLEMENTATION OF POLICIES AND PROCEDURES
In the proposed rule, the Commission requires advisers to adopt and implement policies and procedures designed to prevent violation of the federal securities laws. The proposed rules would require advisers to adopt a system of controls that promote compliance with the securities laws.
Empire supports this approach provided the requirements are reasonable and do not add unnecessary burdens on small firms. Given staff is often limited in small firms, excessive requirements could be difficult to comply with. It is likely that a small firm would not be in a position to hire an individual specifically trained in compliance due to the increase in overhead. Additionally, if an outside firm was required, the cost of such services could increase immensely, again not providing a cost-effective alternative.
Empire also feels that the minimum criteria should be dependant upon the risk undertaken by the institution. Those advisers with less risk should have less stringent requirements. For example, those advisers with full discretion of their clients' accounts take on more risk than those who simply advise their clients. As such, the aforementioned adviser should be required to have more detailed policies and procedures. Additional factors could include whether the adviser deals with fixed income investments or equities and whether the adviser handles institutional or retail accounts. Dealing in fixed income investments and institutional accounts would normally present less risk. In addition to the proposed guidance on minimum criteria for policies and procedures, standardized reports could be beneficial in helping small firms determine their risk.
In the proposed rule, the Commission requires each adviser to review its policies and procedures at least annually to determine their adequacy, accuracy and the effectiveness of their implementation.
Empire supports the proposal to review policies and procedures annually. We feel this is a prudent business practice and is one in which MTAS currently performs. We feel it's a good balance of "safety & soundness" with practicality.
CHIEF COMPLIANCE OFFICER
The Commission is proposing that each adviser designate an individual responsible for administering the compliance policies and procedures. The chief compliance officer should be competent and knowledgeable and should be empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the adviser.
Empire supports this approach provided the chief compliance officer has the ability to delegate some of the compliance duties to other staff with more expertise. We feel the chief compliance officer should be a member of senior management and should have the responsibility of overseeing the compliance function.
We also feel that small firms with parent companies should be allowed to rely on its parent company to assist with the compliance duties. This would lessen the possible need to hire additional staff and/or seek outside assistance, both of which could be more costly than relying on staff currently employed by the parent company.
The Commission is proposing that each adviser maintain copies of their policies and procedures along with records documenting their annual review for a period of five years.
Empire supports this proposal and does not feel it would present any additional burdens on advisers. However, we also feel that any additional recordkeeping requirements may become burdensome, especially for small firms. As such, we strongly feel a proposal and comment period should be issued for any possible future recordkeeping requirements.
ALTERNATIVE/FURTHER PRIVATE SECTOR INVOLVEMENT
The Commission has acknowledged the number of funds and advisers have grown significantly. The Commission states that even if they were able to substantially expand their examination staff, it's unlikely the growth will keep pace with future growth of funds and advisers. Therefore, the Commission is exploring ways to best use limited government funds to protect the millions of investors. One way to leverage government resources is to rely more heavily on the private sector.
The Commission is considering requiring each adviser to undergo periodic compliance reviews by a third-party. Empire does not agree with this approach. Third party reviews can be expensive and do not offer a cost-effective alternative for small firms. Alternatively, we believe that institutions that undertake less risk should be excluded from this requirement.
As stated above, examples of lower risk institutions are those who simply advise their clients as opposed to having full discretion of their clients' accounts. Additional factors could include whether the adviser deals with fixed income investments or equities and whether the adviser handles institutional or retail accounts. Simply advising clients, dealing in fixed income investments and institutional accounts would all normally present less risk and thus should not be subject to a third-party review.
The Commission is also considering the formation of one or more SROs for advisers. Empire agrees with this approach but feels SROs will increase the complexity of the operation substantially. The SRO should be a source to go to for guidance rather than an organization designed to examine advisers. The additional resources would go a long way in ensuring an ample compliance program. Charging the SRO with examining these compliance programs seems more appropriate once institutions establish better compliance programs.
The Commission is considering requiring advisers to obtain fidelity bonds from insurance companies. Empire agrees with this proposal. Investment advisers at MTAS currently do have coverage. We feel insurance coverage is a good way to help pay for looses sustained by fraudulent activities at the adviser firm.
Overall, Empire feels an environment should be created that is insured and provides regulatory support and guidance to oversee reasonable policies and procedures.
Empire commends the Commission's efforts to revise its regulations. If you have any questions regarding our comments, please do not hesitate to contact me.
Christiane G. Hyland
cc: Mike Canning, Executive Director, ACCU
Bill Hall, Associate Director of Taxation & Accounting, NAFCU