If fund companies thought that the days of regulators pressing charges for questionable or illegal mutual fund trading, revenue sharing, gifts, directed brokerage or fund sales were over, they'd better think twice.
One need only look to a number of cases in recent weeks that underscore the determination of the Securities and Exchange Commission, NASD and state regulators to continue to relentlessly pursue improper behavior.
First, the NASD fined AllianceBernstein, Putnam Investments and DWS Scudder $700,000 for showering brokers and many of their spouses with entertainment and guest expenses at training meetings, in an attempt to persuade them to sell their funds.
Then, the NASD fined Raymond James $2.75 million for lax supervision of 1,000 of its producing branch managers between 2000 and 2004. Essentially, the brokerage firm allowed them to monitor their own trades without anyone looking over their shoulder, resulting in improper sales of mutual funds and annuities.
And now Gamco Investors has just indicated in an SEC filing that it has offered the Commission to finally settle an investigation begun in 2003 into mutual fund market timing, setting aside a total of $15 million in reserves for penalties and fines.
Although regulators didn't bring as many cases against mutual fund companies in 2006 as they did in the previous three years, that doesn't mean that their scrutiny is going to let up, according to a white paper from SEI. In fact, the SEC has indicated it will continue to crack down on abuses in the industry.
"With its recent activity, the SEC is clearly sending a message that the compliance bar will be raised in 2007," said Jim Volk, chief accounting officer and chief compliance officer in SEI's investment manager services division. "At SEI, we're sending the message that the best regulatory defense is a good offense."
To remain diligent, SEI recommends that CCOs ask tougher questions and senior managers get involved in compliance issues. Because the SEC has found that only 60% of firms perform "solid annual reviews," firms need to beef up their annual examinations. Firms also need to assess risks more carefully, conduct more rigorous testing of their compliance policies and have a well-defined process for dealing with violations.
Finally, firms must be sensitive to current SEC issues, which now include front running and identity theft.
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