Speech by SEC Staff:
Opening Remarks Before the CCOutreach National Seminar
Andrew J. Donohue1
Director, Division of Investment Management
U.S. Securities and Exchange Commission
November 14, 2007
Good Morning and welcome to the 2007 CCOutreach National Seminar. I join my colleague Lori Richards in welcoming you to today's event and thanking you for your strong support of the CCOutreach program. I am pleased that you could join us today, whether in person or by webcast. Given the timely agenda topics and impressive group of panelists that have assembled for this program, I expect that today's discussions will be well worth your time. I further expect that the dialogue will be equally beneficial for SEC staff members as we gain a better understanding of the experience of on-the-ground compliance professionals.
Today's panels feature senior level officials from the Division of Investment Management, who will discuss policy and regulatory analysis, as well as knowledgeable and experienced examiners from the Office of Compliance Inspections and Examinations, who will discuss their experiences in examining firms' compliance programs, the deficiencies they see, and the compliance practices that appear to be effective. In addition, the true stars of our panels will be the CCOs themselves. CCOs from both a large firm and a smaller firm will participate on each panel to provide a very practical, real-world perspective to the discussions.
Today's Seminar, as in previous years, will include discussions of highly relevant issues of the day. The first panel will discuss the importance of synergy in compliance and operations. It will also examine regulatory changes that affect your compliance obligations — as well as compliance controls in the areas where our examiners find the most deficiencies. Most importantly, the panel will discuss the CCO's role in managing the compliance process and what time has taught us since the CCO position was first implemented for funds and advisers three years ago. Many of us, both regulators and CCOs, have thoughts and observations on the evolving role of the CCO, so I look forward to that panel.
The second panel will discuss the CCO's role in a changing environment. As we are all aware, the financial markets are evolving at a significant pace. As compliance professionals, it is critical to keep abreast of these developments, which at times can seem a challenging task. Today's discussion will look at how to address compliance risks that arise with the emergence of new and complicated financial products. The Commission staff and the panel's CCOs will discuss compliance and oversight processes in light of new industry developments. This should be a fascinating discussion and one I think you will find particularly useful in developing your own compliance systems in response to new products.
This afternoon, the first panel's discussion will highlight some of the special compliance concerns related to fixed income investments and derivatives. In terms of valuation, best execution and even documentation, investments in fixed income securities and derivative instruments present unique challenges for CCOs that may not be readily apparent. This panel also will include a discussion of compliance controls that can be effective for firms that are managing fixed income and derivative investments.
The final panel of the conference provides insight on the examination and risk assessment process, with a special focus on how the examination staff conduct the risk rating process, the role that healthy compliance controls can play in mitigating risk, and what it means to be "high risk." I know these issues are very much on the minds of many CCOs.
Before turning the program over to our first expert panel, I would like to discuss an issue that has been very much on my mind recently — and hopefully on your mind as well. And that issue is valuation, including the valuation of distressed securities in light of the recent market environment. Valuation issues will be discussed in some detail on today's panels.
For those of you who are mutual fund CCOs, valuation is a daily concern. Fund investors expect a daily calculation of a fair and accurate net asset value for their fund shares. The role of the CCO in ensuring that a fair and accurate net asset value is calculated is essential. Just as current market conditions have made valuations more challenging, the turmoil in the markets has accentuated the need for investors to receive net asset value calculations that are accurate. As a result, it is imperative that fund CCOs focus on valuation.
The obligation to value accurately and appropriately, however, does not stop with funds. CCOs of advisory firms should similarly be focused on valuation issues. Those firms that manage separate accounts, hedge funds and other types of investment vehicles have a fundamental obligation to value appropriately and fairly, even if a vehicle or account is not subject to the Investment Company Act's valuation requirements. In fact, it is important that compliance professionals go back and review the disclosures that have been made to clients regarding valuation processes and procedures. As part of this review, compliance professionals would be wise to make sure that those valuation processes and procedures are implemented in a consistent manner — and in accordance with the disclosures provided to clients. In the current market conditions, all of us should have a heightened awareness of the importance of valuation and its impact on advisory clients.
Before leaving the podium this morning, I want to extend a special acknowledgement to each of you who is a fund or adviser CCO. In my view, the investment management industry operates better because of you. And even though you may function behind the scenes, possibly without a fund client or firm investor ever knowing your name, fund investors and advisory firm clients are well-served by your tenacity, attention to detail and commitment to serving America's investors. Thank you very much.
With that, I would like to turn the program over to the moderator of our first panel, my colleague in the Division of Investment Management, and someone who is well known for his expertise regarding investment management regulation, Bob Plaze.