“Good Counsellors”: Remarks Before the Investment Adviser/Investment Company National Seminar: Compliance Outreach Program
Nov. 15, 2022
Good morning. Welcome to the Compliance Outreach Program of the Securities and Exchange Commission’s Investment Adviser/Investment Company National Seminar.
My thanks to the SEC staff for organizing this seminar—particularly in the Divisions of Examinations, Enforcement, and Investment Management—and to the industry participants in the audience and on today’s panels.
As is customary, I’d like to note that my views are my own, and I’m not speaking on behalf of my fellow Commissioners or the staff.
In thinking about compliance, my mind goes to two texts—not the off-channel communications that firms are required to document—but rather two texts from long ago: one from nearly 400 years ago, and another from nearly 4,000 years ago.
First, there’s Shakespeare, who wrote in his 1623 comedy Measure for Measure: “Good counsellors lack no clients.”
As chief compliance officers, I think that you all seek to be considered as “good counsellors.”
That brings me to the second text, one written in stone: the Hammurabi Code. Written nearly four millennia ago, the code included various provisions about borrowing, lending, and interest rates related to silver and grain, the currencies of the day. Even in 1700 BCE, the code’s authors understood that there were inherent conflicts of interest when it comes to finance.
Thousands of years later, “good counsellors” understand this aspect of human nature as well. When someone manages another person’s money, there will be conflicts and differing incentives. When those incentives and conflicts are managed well—through laws, rules, regulations, and gatekeepers acting as “good counsellors”—that helps to protect investors.
As gatekeepers, you help to build and maintain what financial systems need to function: trust. You’re the first line of defense—not just, crucially, for investors, but also for your colleagues, who are working to meet various revenue goals for your firms and clients. In following the law, protecting the reputational capital of your firms, and delivering for investors, you help to maintain trust in our system.
I know from experience that this can be challenging, and requires careful balancing on your part. You have to understand the business models, the rules related to those models, and how those rules apply. Further, though, you have to maintain a meaningful, ongoing conversation with your colleagues on the revenue side—while maintaining the critical independence and segregation of duties from the revenue function of your firms.
Speaking from my own experience as a Chief Financial Officer and a co-head of finance: there are times when you will need to say no. Further, I know that some of your colleagues might think it better not to consult—preferring, so to speak, to beg for forgiveness rather than ask for permission.
Generally, though, your colleagues will respect you more and thank you for being those “good counsellors,” saying no, giving them clear direction, and working with them to find compliant solutions.
Today, while I’m thinking of two texts from Shakespeare and Hammurabi, our seminar is on two different texts: The Investment Advisers Act and Investment Company Act of 1940.
We have a number of interesting panels relating to your work, as “good counsellors,” to comply with these texts. I would like to discuss a few of these panels.
National Seminar Agenda
I’m glad that on one of today’s panels, you’re going to hear about the interplay between Regulation Best Interest (Reg BI) for broker-dealers and the fiduciary standard for investment advisers (IA fiduciary standard).
Earlier this year, staff published two bulletins related to Reg BI and the IA fiduciary standard, and plan to publish more. At the heart of Reg BI and the IA fiduciary standard is something my mom, Jane Gensler (who, by the way, was a really “good counsellor”) would have said: You have to put your client’s interests first.
Advisers have to comply with specific duties relating to care and loyalty. To meet these duties, advisers—guided by their compliance officers—need, among other things, to prevent their own interests from inappropriately influencing their recommendations and advice. If advisers can’t do that, they have decisions to make: eliminate the conflict, don’t give the advice, or find some other way to ensure that they don’t put their interests ahead of the investor’s interests.
Another panel relates to the 2020 modernized marketing rule for advisers, which had a compliance date of November 4, 2022. At its core, this rule is about truth in marketing. Even as technologies and marketing communications evolve, that does not change an adviser’s core obligations to its clients and investors.
The valuation rule established an updated regulatory framework for fund valuation practices, helping to ensure that a fund’s investments are appropriately valued.
The derivatives rule is designed to provide investor protections and regulatory certainty, such as through imposing certain risk limits on funds’ derivative use and requiring funds to implement related risk management programs.
Recent enforcement actions highlight the importance of maintaining investor protections relating to complex products. Our enforcement actions against Archegos Capital Management, Allianz Global Investors, and senior managers at Infinity Q Capital Management are but a few.
Fraud is fraud, regardless of the investors being defrauded and the types of securities used in the fraud. New rules can give “good counsellors” additional tools to help ensure that funds’ valuation and derivative use stay in line with investor protections. Let me emphasize how important segregation of duties are, particularly as relates to derivatives and valuations.
Finally, today’s program has a panel on Environment, Social, and Governance (ESG) matters for funds and advisers. At the foundation of our securities laws is a basic bargain. Investors get to decide which risks to take, and funds and advisers dealing with the public’s money have to provide full, fair, and truthful disclosure. If a fund or its adviser omits or misleads investors on material information—including about the role ESG plays in its investment selection process—that fund violates the securities laws. We determined as much when we charged BNY Mellon Investment Adviser for misstatements and omissions relating to its ESG considerations.
Shakespeare tells us that “good counsellors lack no clients.” I believe compliance professionals are “good” when they understand not only the laws and the rules, but also understand and manage these conflicts inherent in human nature—conflicts documented as far back as the Hammurabi Code.
I thank you for attending today’s seminar, and I encourage you to incorporate what you learn into your work as “good counsellors.”
 See In re J.P. Morgan Securities LLC, Release No. 34-93807 (Dec. 17, 2021), available at https://www.sec.gov/news/press-release/2021-262. See also In re Barclays Capital Inc., Release No. 34-95919 (Sept. 27, 2022); In re Citigroup Global Markets Inc., Release No. 34-95920 (Sept. 27, 2022); In re BofA Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Inc., Release No. 34-95921 (Sept. 27, 2022); In re Goldman Sachs & Co. LLC, Release No. 34-95922 (Sept. 27, 2022); In re Jefferies LLC, Release No. 34-95923 (Sept. 22, 2022); In re Morgan Stanley & Co. LLC and Morgan Stanley Smith Barney LLC, Release No. 34-95924 (Sept. 27, 2022); In re Nomura Securities International, Inc., Release No. 34-95925 (Sept. 27, 2022); In re Credit Suisse Securities (USA) LLC, Release No. 34-95926 (Sept. 27, 2022); In re Cantor Fitzgerald & Co., Release No. 34-95927 (Sept. 27, 2022); In re Deutsche Bank Securities Inc. DWS Investment Management Americas, Inc., and DWS Distributors, Inc., Release No. 34-95928 (Sept. 27, 2022); In re UBS Financial Services Inc. and UBS Securities LLC, Release No. 34-95929 (Sept. 27, 2022), available at https://www.sec.gov/news/press-release/2022-174.
 See https://history.hanover.edu/courses/excerpts/165hammurabi.html; e.g., “A merchant may collect interest of thirty-three and one-third per cent on a loan of grain, and twenty per cent interest may be charged on a loan of silver.”
 See Securities and Exchange Commission, “Regulation Best Interest: The Broker-Dealer Standard of Conduct” (Sept. 10, 2019), available at https://www.sec.gov/rules/final/2019/34-86031.pdf. See U.S. Securities and Exchange Commission, “Commission Interpretation Regarding Standard of Conduct for Investment Advisers” (July 12, 2019), available at https://www.sec.gov/rules/interp/2019/ia-5248.pdf. See U.S. Securities and Exchange Commission, “Regulation Best Interest, Form CRS and Related Interpretations” (March 30, 2022), available at https://www.sec.gov/regulation-best-interest.
 See Securities and Exchange Commission Staff, “Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors” (March 30, 2022), available at https://www.sec.gov/tm/iabd-staff-bulletin. See also Securities and Exchange Commission Staff, “Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers” (Aug. 3, 2022), available at https://www.sec.gov/tm/iabd-staff-bulletin-conflicts-interest.
 See Gary Gensler, “Investor Protection in a Digital Age’: Remarks Before the 2022 NASAA Spring Meeting & Public Policy Symposium Remarks” (May 17, 2022), available at https://www.sec.gov/news/speech/gensler-remarks-nasaa-spring-meeting-051722.
 See Securities and Exchange Commission, “SEC Adopts Modernized Regulatory Framework for Derivatives Use by Registered Funds and Business Development Companies” (Oct. 28, 2020), available at https://www.sec.gov/news/press-release/2020-269
 The compliance date for Rule 18f-4, the new derivatives rule, was Aug. 19, 2022, and the compliance date for Rule 2a-5 relating to the valuation of securities was Sept. 8, 2022.
 For the Allianz matter, see SEC v. Tournant, et al., No. 22 Civ. 4016 (S.D.N.Y.) (complaint filed May 17, 2022); In re Allianz Global Investors U.S. LLC, Release No. 34-94927 (May 17, 2022); In re Trevor L. Taylor, Release No. 34-94925 (May 17, 2022); In re Stephen G. Bond-Nelson, Release No. 34-94926 (May 17, 2022), available at https://www.sec.gov/news/press-release/2022-84. For the Archegos matter, see SEC v. Hwang, et al., No. 22 Civ. 3402 (S.D.N.Y.) (complaint filed Apr. 27, 2022), available at https://www.sec.gov/news/press-release/2022-70. For the Infinity Q matter, see SEC v. Velissaris, No. 22 Civ. 1346 (S.D.N.Y.) (complaint filed Feb. 17, 2022), available at https://www.sec.gov/news/press-release/2022-29.
 See Gary Gensler, “‘This Law and Its Effective Administration’: Remarks Before the Practising Law Institute’s 54th Annual Institute on Securities Regulation” (Nov. 2, 2022), available at https://www.sec.gov/news/speech/gensler-remarks-practising-law-institute-110222.