Just because an investment firm tells you that they have compliance controls in place means little. Unless they actually outline and then walk you through their operations, investors simply cannot trust what is being told to them. To emphasize this point, some very smart people that work for the very largest investment firms are just as likely to deceive as those from smaller, lesser known entities that are stretched on human resources. Investors should assume nothing and verify everything.
You Know There is a Problem When Clients Represent the Firm’s Final Line of Defense
When clients themselves discover breaches they have essentially become the firms’ last line of defense. No matter the size of the investment firm, this is completely unacceptable and goes against what regulators enforce. Case in point, in the article How did an Unsolicited and Unknown Trading Authority Become Associated with my Personal Account?, it is mentioned how in a breach situation it does not matter whether trading occurred. Rather, the breach had to do with the fact that a person had the ability to access the account as a result of insufficient controls put in place. This is grave negligence on the part of the firm because no client should be the last line of defense. This function must be served from within the investment firm itself.
Sometimes investment firms go out of their way to hire former regulator employees and/or attorneys to fulfill the role of Chief Compliance Officer. Running an investment firm requires the skill set of not just interpreting regulation. It also requires a leading edge know-how of putting in place the proper controls that align with firm policies and procedures. Therefore, the compliance team must have proactive and hard-working members that have the expertise at conceiving and implementing controls. On many an occasion CCOs with too much regulatory or legal and not enough practical experience have asked how best to impliment certain controls, be it prompts or after-the-fact quality control measures. This question is typically queried by CCOs that have insufficient experience at implementing controls and that oversee teams that also lack this skillset.
Like anything else, actions speak larger than words. Some compliance individuals perform a tap dance and preach how great their controls are when just the other day it was discovered that their sub-par program resulted in a breach of a client’s identity.
Investors need to be on full alert especially if they perceive themselves to be a small fish in a large pond. Investment firms can embellish and downplay their shortcomings. Do not fall into their trap – stand strong. Sooner or later their incompetence will make itself known at which point they will fall out of favour with their upper echelons unenamored by them causing their firm to have heightened reputational risk. Better individuals will eventually get a chance to implement elevated industry compliance practices. Darwin’s Theory of Natural Selection has a way of righting the world’s wrongs.
Phocion Investment Services (Head Office) | 1010 Sherbrooke Street West, Suite 1800 | Montreal, Quebec | H3A 2R7 CanadaPDF version