Yvonne I. Pytlik is a Managing Partner at Global
Compliance Risk Management Corporation
(GlobalRMC) in New York City. Glob...
moment to define the path forward to the
‘future of enterprise risk management’ and
mitigation strategies of increasing co...
approach that regulators will enforce and
pro-active asset management embrace
going forward to protect their firms,
invest...
cally combated fraud in the financial mar-
kets as one of its key missions.17
From fiscal year (FY) 2007 through FY
2009, ...
component to prevent compliance viola-
tions thus to mitigate significant business
risk to financial firms, banks, hedge f...
between compensation arrangements
and corporate risk taking.
• Financial institutions created asymmet-
ric compensation pa...
authority within the organisation to
compel others to adhere to the compli-
ance policies and procedures:36–38
• Written c...
• Portfolio trading monitoring, cross-
trade activity, trade allocation and
bunching, trading with affiliates, soft
dollar...
cent) involved financial fraud or public
company reporting violations; 511 (over
25 per cent) involved fraud or other
misc...
Page 189
Pytlik and Myers
(20) Ibid.
(21) See ref. 2.
(22) See ref. 3.
(23) Ibid.
(24) Ibid.
(25) President’s Working Grou...
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Yvonne I Pytlik Journal Of Securities Law, Regulation & Compliance April 2010 Volume 3 Number 2

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April 2010 - Journal of Securities Law, Regulation & Compliance Volume 3 Number 2

Compliance risk: A critical business risk
for asset managers

ABSTRACT
2010 presents a historical moment to define the
path forward to the ‘future of enterprise risk
management and mitigation strategies’ of
increasing compliance risk for asset managers.1–4
The recent financial crises and cases of material
compliance violations, Ponzi schemes, fraudulent
activities, misappropriation of investors’ assets
and collapse of major financial firms have had
significant, harmful impact on investors and
shareholders. Serious compliance violations, such
as insider trading, have proven to be self-destructive
to asset managers. No one is immune to
these trends. ‘Enterprise Risk Management —
2010 and Beyond Forward Looking Approach
by Asset Managers’ is a series of papers dedicated
to regulatory developments and industry best practices in the enterprise risk management
with a focus on ‘compliance risk: a critical business
risk for asset managers’.

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Yvonne I Pytlik Journal Of Securities Law, Regulation & Compliance April 2010 Volume 3 Number 2

  1. 1. Yvonne I. Pytlik is a Managing Partner at Global Compliance Risk Management Corporation (GlobalRMC) in New York City. GlobalRMC, a strategic advisory and compliance risk manage- ment firm, focuses on Enterprise Risk Management principles, governance techniques and cutting-edge compliance solutions. Yvonne is a senior executive and one of the industry’s most highly regarded strategists in compliance risk management and corporate governance for financial institutions. As a global head of risk management at Deutsche Bank AG, she devel- oped and implemented global risk management and governance oversight in the Americas, Europe and Asia-Pacific regions. She is a com- pliance subject-matter expert in CCO regula- tions for global asset managers. Jennifer S. Myers is a Managing Partner at GlobalRMC. She is a senior compliance and risk management lawyer who provides analysis and strategic advice to financial institutions and asset managers on regulatory compliance, risk management, and corporate governance issues. She began her career at the New York City office of Shearman & Sterling. Jennifer holds a JD degree from Harvard Law School and a BA from Yale University. ABSTRACT 2010 presents a historical moment to define the path forward to the ‘future of enterprise risk management and mitigation strategies’ of increasing compliance risk for asset managers.1–4 The recent financial crises and cases of material compliance violations, Ponzi schemes, fraudulent activities, misappropriation of investors’ assets and collapse of major financial firms have had significant, harmful impact on investors and shareholders. Serious compliance violations, such as insider trading, have proven to be self-destruc- tive to asset managers. No one is immune to these trends. ‘Enterprise Risk Management — 2010 and Beyond Forward Looking Approach by Asset Managers’ is a series of papers dedi- cated to regulatory developments and industry best practices in the enterprise risk management with a focus on ‘compliance risk: a critical busi- ness risk for asset managers’. Keywords: risk management, compli- ance, compliance risk, governance, chief compliance officer, SEC, FINRA, FED, FDIC, FSA INTRODUCTION The most recent financial crisis and major overhaul of financial services regulations are causing asset managers to challenge their enterprise risk management infrastructure, governance, methodologies, standards and processes to further improve their risk man- agement efforts. 2010 is a historical Journal of Securities Law, Regulation & Compliance Volume 3 Number 2 Page 180 Journal of Securities Law, Regulation & Compliance Vol. 3 No. 2, pp. 180–189 ᭧ Henry Stewart Publications, 1758–0013 Compliance risk: A critical business risk for asset managers Yvonne I. Pytlik* and Jennifer S. Myers** Received (in revised form): 25th February, 2010 *Global Compliance Risk Management Corporation, 245 Park Avenue, 24th Floor, New York, NY 10022, USA. Tel: +1 781 835 8360; E-mail: ypytlik@GlobalRMC.com **Global Compliance Risk Management Corporation, 245 Park Avenue, 24th Floor, New York, NY 10022, USA. E-mail: jmyers@GlobalRMC.com Pytlik:JSC page.qxd 26/04/2010 13:56 Page 180
  2. 2. moment to define the path forward to the ‘future of enterprise risk management’ and mitigation strategies of increasing compli- ance risk for asset managers. The recent array of material compli- ance violations, Ponzi schemes and fraud- ulent activities,5 misappropriation of investors’ assets and collapse of major financial institutions have had significant, harmful impact on investors and share- holders.6 Compliance is becoming a critical ele- ment of an overall enterprise risk manage- ment framework. Leading asset managers are taking a proactive and comprehensive approach in identifying emerging risks, such as compliance and business risks. Compliance risk is expected to increase even further due to re-assessing post-crisis economic conditions, increasing complex- ity of business offerings, global business expansions combined with increasing complexity of the regulatory landscape, cross-jurisdictional regulations and the imposition of higher compliance standards by regulators and investors. The challenge for most asset managers is to effectively manage enterprise and com- pliance risks, find efficiency in the way that risk management protects and creates the greatest value for asset managers, investors and shareholders by balancing risk, cost and value across the enterprise. Asset man- agers who effectively address this challenge will not only protect their firm by creating sustainable values, but will also outperform their competitors. 2010 REGULATORY FOCUS Regulators are urging board members and senior managers to be more proactive in setting risk ‘appetite’ for financial institu- tions, establish effective risk governance oversight and compliance programmes, and in setting and maintaining a stated tol- erance for risk. Enterprise Risk Management is a critical strategic and business decision-making framework for identifying, monitoring and managing risk across the whole organisation. The recent financial crisis and material compliance violations, in many cases, resulted from inadequate risk management functions and weaknesses in compliance governance leading to business risks.These risks directly resulted in reputational damage for asset managers, a collapse of financial institutions and significant capital losses for investors and shareholders. In her 2010 Testimony Concerning the State of the Financial Crisis, US Securities and Exchange Commission (SEC) Chairman Mary L. Schapiro highlighted the primary causes of the financial crisis related to risk management:7 • A siloed financial regulatory framework that lacked the ability to monitor and reduce risks across entities and markets. • Insufficient risk management and risk oversight by boards and management. • Perverse incentives and asymmetric compensation arrangements that encouraged significant risk-taking. • A widespread view that markets were almost always self-correcting resulted in weaker standards and regulatory gaps. • The proliferation of complex financial products that was not fully transparent. The SEC and other regulatory agencies will continue to address legal and regula- tory gaps that came to light during the recent crises thus helping policymakers to build better regulatory oversight across financial services industry. COMPLIANCE RISK IS EMERGING AS CRITICAL BUSINESS RISK Enterprise Risk Management with com- pliance as a critical component to mitigate business risk is a forward-looking Page 181 Pytlik and Myers Pytlik:JSC page.qxd 26/04/2010 13:56 Page 181
  3. 3. approach that regulators will enforce and pro-active asset management embrace going forward to protect their firms, investors and shareholders.8–10 Regulators and leading asset manage- ment firms strive to improve their risk management efforts and aspire towards the integration of risk management infrastruc- ture, methodologies and standards with compliance as a critical component of a ‘single view of risk’ across the organisation. The US Federal Reserve Board Chairman Ben S. Bernake has explicitly stated that ‘policy makers must insist that the large financial firms be capable of mon- itoring and managing their risk in a timely manner and on an enterprise-wide basis’. In October 2009, a group of senior financial supervisors from five major nations reported that financial firms still need ‘full and ongoing commitment to risk control by management, as well as dedication of considerable resources toward developing the necessary informa- tion technology infrastructure’ to imple- ment the best practices for pro-active risk management in their firms.11 President Obama’s ‘Financial Regulatory Reform’ and other regulatory initiatives currently before the US Senate, also impose higher regulatory standards and implies best practices that will guide the financial services industry in imple- menting effective risk management and compliance programmes.This new regula- tory framework clearly positions Enterprise Risk Management as the best practice for financial institutions to recali- brate in a post-crisis global financial system.12 COMPLIANCE VIOLATIONS ARE DETRIMENTAL TO ASSET MANAGERS As economic turmoil leads to compliance risk, reputational damage and eventually to business risk, equally, material compliance violations lead to serious consequences for asset managers, which in turn, become business risk.13 The recent cases of insider trading, Ponzi schemes, fraud and other compli- ance violations have had a tremendous impact on the industry. Serious compli- ance violations impact investors, share- holders and are self-destructive to asset managers themselves. No one is immune to these trends.14 As the recent demise of Galleon Management LP clearly shows, one of the most significant business risks that asset managers face today is compliance risk. Perhaps, a better word might be ‘vaporisa- tion’ — in the face of parallel civil and criminal cases brought by the SEC against Galleon, the former high-flying hedge fund went out of business in a matter of days. As Robert Khuzami, Director of the SEC’s Division of Enforcement,15 point- edly stated in announcing the Galleon indictments: ‘We [SEC] are developing a variety of initiatives to do that involve greater specialisation and expertise, improved technological tools to track and analyse trading, better coordination among regulators and law enforcement, new legislative initiatives, and other means to address these areas. It would be wise for investment advisers and corpo- rate executives to closely look at today’s case, their own internal operations, and the increasing focus and scrutiny on hedge fund trading activity by the SEC and others, and consider what lessons can be learned and applied to their own operations.’16 REGULATORY ENFORCEMENT Regulatory agencies clearly will enforce non-compliance and vigorously prosecute firms for violations. The SEC has histori- Compliance risk: A critical business risk for asset managers Page 182 Pytlik:JSC page.qxd 26/04/2010 13:56 Page 182
  4. 4. cally combated fraud in the financial mar- kets as one of its key missions.17 From fiscal year (FY) 2007 through FY 2009, the SEC opened 2,610 investiga- tions and brought 1,991 cases charging a variety of securities laws violations includ- ing, and beyond, those related to the causes of the financial crisis.18 Major recent regu- latory enforcement actions include: • October 2009, Galleon Group founder is arrested along with five others for US$20m insider trading scheme involv- ing IBM, Intel and McKinsey; • December 2008, Bernard L. Madoff, who is currently serving a 150-year sentence in federal prison, orchestrated a multi-billion dollar Ponzi scheme that swindled money from thousands of investors; • September 2009, the SEC accuses Reza Saleh for making US$8.6m in illegal profit, which he agreed to return in set- tlement with the SEC; • February 2008, Hong Kong banker and two others paid 24 million US Dollars to settle civil charges. Even aside from the Galleon and Madoff cases, this is a critical moment for asset managers to reassess their compliance risk management programmes. Both Congress and the SEC have identified a need for more rigorous risk management practices for the financial institutions, and hedge fund regulation as key goals of an ambitious financial regulatory reform programme. REGULATORY REFORMS The SEC’s enforcement initiatives to date in 2010 reflect the broader scope of the pending regulatory reform. The SEC con- siders much more aggressive enforcement a ‘vital part of risk management and crisis avoidance’ to restore investor confidence and hold market participants accountable. In her testimony concerning the state of the financial crisis, SEC Chairman Mary L. Schapiro stated: ‘Consistent and vigorous enforcement is a vital part of risk management and crisis avoidance — par- ticularly in times and areas of substantial financial innovation’ highlighting major future regulatory initiatives:19 • The vital importance that vigorous enforcement of existing laws and regu- lations plays in the fair and proper func- tioning of financial markets. • Vigorous enforcement is essential to restoring and maintaining investor con- fidence. • Through aggressive and even-handed enforcement, we deter others from engaging in wrongdoing. • Enforcement agencies should continue to work together to address financial crimes. • Large financial crimes can often involve multiple jurisdictions and legal frame- works making it essential for different agencies to work closely together. LEADING ERM AND COMPLIANCE INDUSTRY BEST PRACTICES Looking forward, a ‘single view across the organisation towards the future of enter- prise risk management’ becomes a neces- sary response to the evolution of risk.20–22 Enterprise Risk Management practices that ‘demonstrated a comprehensive approach to viewing firm-wide exposures and risks’ were cited by the Senior Supervisory Group as differentiating fac- tors to more effectively mitigate overall business risks. Enterprise Risk Management, a firm- wide integrated risk management approach allows financial firms to analyse current, evolving and emerging risks across the whole firm. Compliance and regulatory risk management is a vital Page 183 Pytlik and Myers Pytlik:JSC page.qxd 26/04/2010 13:56 Page 183
  5. 5. component to prevent compliance viola- tions thus to mitigate significant business risk to financial firms, banks, hedge funds, and asset managers. This is a critical moment for asset man- agers to reassess their compliance risk management programmes and take much more proactive actions to address compli- ance risk as a critical business risk. There are several areas where proactive asset managers may protect their firms and investors: first and foremost, having a single view across the organisation and truly identifying in a systematic and methodological way the highest risk across the organisation. One of these risks is insider trading which should be on the agenda for boards and senior management and executive committees.23 COMPLIANCE RISK MITIGATION STRATEGIES As an integral part of an enterprise risk management strategy, financial firms should be looking at their internal envi- ronments and achieving a greater under- standing as to how compliance violations can be prevented, monitored and resolved in a timely manner. Having a strong governance, escalation process and remediation strategy is critical in mitigating compliance and business risks. From that perspective, asset managers need strong methodologies and standards. The second area to be evaluated in light of insider trading and other serious com- pliance violations is companies’compliance programmes across the organisation. What types of policies are in place to address serious compliance violations, including insider trading and other critical regulatory rules and laws? What kinds of procedures and control infrastructure are in place on the business side, and what supervision is in place to effectively identify insider trading and serious compliance violations?24 The compliance programme should generate a comprehensive and timely report for senior management and govern- ance boards that provides current industry ‘hot topics’, emerging regulatory, business strategic, operational, financial, and market risks. Both qualitative and quantitative measures of internal controls’ effectiveness and mitigation strategies of high risks for each business and compliance unit should be an integral part of corporate risk gover- nance and oversight. CORPORATE RISK GOVERNANCE In December 2009, the SEC adopted rule amendments that will significantly improve disclosure in the key areas of risk, compensation, corporate governance and director qualifications, including: • Management and Boards of Directors to be more accountable. The quality of a board’s oversight of risk management can make an enormous difference in our economy, and particularly in finan- cial markets. • A fundamental concept underlying cor- porate law is that a company’s board of directors, while charged with oversight of the company, is accountable to its shareholders, who in turn have the power to elect the board. • Thus, boards are accountable to share- holders for their decisions concerning, among other things, executive pay, and for their oversight of the companies’ management and operations, including the risks that companies undertake. • Enhanced disclosure about the deci- sions and performance of directors will help shareholders make informed deci- sions about the election of directors. • Short-term compensation incentives can drive long-term risk. Another lesson learned from the crisis is that there can be a direct relationship Compliance risk: A critical business risk for asset managers Page 184 Pytlik:JSC page.qxd 26/04/2010 13:56 Page 184
  6. 6. between compensation arrangements and corporate risk taking. • Financial institutions created asymmet- ric compensation packages that paid employees enormous sums for short- term success, even if these same deci- sions result in significant long-term losses or failure for investors and tax- payers.25 FIDUCIARY RESPONSIBILITIES In addition, the SEC is focusing on asset managers’ fiduciary standard of conduct as part of a heightened regulatory regime when providing services to their clients:26–28 • Regulation should be rationalised for broker-dealers and investment advisers, particularly with respect to the services they provide to retail investors. • Investment advisers are fiduciaries to their clients with a fundamental obliga- tion to act in the best interests of clients and to provide investment advice in clients’ best interests. • They have a duty of undivided loyalty and utmost good faith and must not engage in any activity in conflict with the interest of any client. • Fiduciary obligations mandate reason- able care to avoid misleading clients and to provide full and fair disclosure of all material facts to clients and prospective clients, including conflicts of interests. Generally, facts are ‘material’ if a reason- able investor would consider them to be important. • Departure from fiduciary standards may constitute ‘fraud’. Registered investment companies and registered investment advisers must have effective compliance programmes29 to prevent, detect and promptly correct com- pliance violations. The Chief Compliance Officer should be empowered with full responsibility and authority to develop and enforce appro- priate policies and procedures for the firm. GUIDING PRINCIPLES FOR COMPLIANCE RISK MANAGEMENT According to the SEC Rules, a compli- ance programme should be reasonably designed to ensure compliance with fed- eral securities laws, including the follow- ing key components:30–35 • Corporate governance with clearly defined accountabilities and responsibil- ities for compliance programme; • ‘Tone at the Top’ and a strong compli- ance culture should be established through senior management commit- ment and partnership with compliance; • Enterprise risk assessment and manage- ment to properly identify systematic risks and mitigation strategies across an organisation; • Appropriate oversight committees as a forum for the business to raise its con- cerns with Compliance and Legal should be in place and meet regularly; • A high awareness level of compliance issues, including developing regulatory trends, should be established; • A risk assessment methodology and risk-based compliance programme, including compliance audits, reviews and testing, and service provider over- sight should be in place; • A ‘global view’ on compliance and regulatory requirements should be extended to encompass all relevant business activities and regions globally. BUILDING AN EFFECTIVE COMPLIANCE PROGRAMME The Chief Compliance Officer should have a position of sufficient seniority and Page 185 Pytlik and Myers Pytlik:JSC page.qxd 26/04/2010 13:56 Page 185
  7. 7. authority within the organisation to compel others to adhere to the compli- ance policies and procedures:36–38 • Written compliance policies and proc- edures should be reasonably designed and implemented to prevent, detect and promptly correct any violation of the federal securities laws. • Comprehensive compliance monitor- ing, surveillance programmes and foren- sic testing over regulatory requirements should be established. • Training should be regularly provided by Compliance and Legal to business personnel so they are aware of and may properly supervise compliance with regulatory requirements. • Regular management reporting of standing compliance/legal issues and open audit points should be in place to ensure accountability and expedient resolution of compliance issues. • Open communication and escalation of compliance matters and issues to invest- ment company boards should be estab- lished. • Compliance issues should be effectively resolved and business groups should take responsibility for addressing areas identified for improvement. COMPLIANCE RISK ASSESSMENT METHODOLOGY A compliance risk assessment is an integral part of a compliance programme, guiding the allocation of compliance resources, assisting in the development of compli- ance monitoring surveillance programmes, and testing activities for those areas that pose the greatest potential risks to asset managers and their clients. Because regulatory, economic, industry and operating conditions will continue to change, regulatory and market risk moni- toring should be built into the risk assess- ment methodology to ensure that the identification and evaluation of compli- ance risks is a proactive and dynamic process. Asset managers should consider estab- lishing a disciplined compliance risk assessment methodology for identifying, measuring and mitigating compliance risks. ANNUAL RISK-BASED REVIEW AND TESTING PROGRAMME The review and testing programme is a robust process to validate key infrastruc- ture supporting the compliance pro- gramme requirements in place, to identify potential conflicts of interest within the organisation and to identify compliance risk ‘trigger events’. The review and test- ing programme should encompass an evaluation of the adequacy of the policies and procedures and an assessment of the effectiveness of their implementation, supervisory controls, existence and evi- dence of supervision, training and moni- toring programmes by asset managers in connection with complying with federal securities laws. COMPLIANCE AND SURVEILLANCE MONITORING, FORENSIC TESTING Asset managers should have a comprehen- sive on going compliance programme for monitoring, surveillance and testing of business activities to prevent, detect and promptly correct violations of federal securities laws. A comprehensive compliance pro- gramme should monitor the following key regulations: • Insider trading and Chinese walls, con- flicts of interests, portfolio management — investment guidelines and restric- tions monitoring; Compliance risk: A critical business risk for asset managers Page 186 Pytlik:JSC page.qxd 26/04/2010 13:56 Page 186
  8. 8. • Portfolio trading monitoring, cross- trade activity, trade allocation and bunching, trading with affiliates, soft dollars, insider trading, and personal trading monitoring; • Gifts and entertainment monitoring; • Code of Ethics, proxy voting, conflicts of interests; sales practices, licensing and registration, disclosures, marketing materials review; • Anti-money laundering review and monitoring. An asset manager’s goal should be to develop and implement system-based compliance monitoring, surveillance pro- grammes and forensic testing with a max- imum level of automation. CORPORATE OVERSIGHT AND ESCALATION REPORTING The compliance programme should gen- erate a comprehensive and timely report for senior management and investment governance boards. These reports typically provide current industry ‘hot topics’ and emerging enterprise-wide risks, including: business strategic, regulatory compliance, operational, financial, credit and market risks. The qualitative and quantitative measurements of internal controls effec- tiveness and mitigation strategies of high risks should encompass each business and compliance unit across an organisation. FORWARD-LOOKING RISK MANAGEMENT AND COMPLIANCE The current economic and business envi- ronment is forcing a fundamental change in the regulatory landscape, organisational culture, corporate governance and compli- ance oversight of asset managers, and is moving the industry towards a holistic view of enterprise risk management.39–41 The choice facing asset managers is not whether to implement these changes but what approach to take in implementing them. As the business and regulatory envi- ronment continues to evolve, asset man- agers that succeed will be those that can demonstrate the ability to drive business performance and achieve regulatory com- pliance by strategically aligning risk man- agement and business strategies. One central mechanism for reducing systemic risk and pro-actively manage avoiding future crises as well as achieving regulatory compliance is to ensure the same rules apply to economically equiva- lent asset managers globally. Asset managers should ensure that risk for similar products and asset classes are mitigated similarly. CONCLUSION Enterprise risk management is set to be on regulatory authorities, boards, investors, shareholders and asset managers’ agendas for some time to come. As asset managers seek the right enterprise risk management approaches, there is a clear need in the financial services industry for more proac- tive, leading practice toward the ‘future of enterprise risk management’. A strategic enterprise risk management approach can help asset managers to navigate and develop a more forward-looking approach to effectively manage increasing compli- ance risk as a critical business risk. An effective compliance programme across the organisation is a critical compo- nent of business stability and success. References (1) Schapiro, M. L. (2010) ‘Testimony Concerning the State of the Financial Crisis’, SEC, Before the Financial Crisis Inquiry Commission, 14th January, http://www.sec.gov/news/testimony/20 10/ts011410mls.htm. Of the 1,991 cases, 519 (over 26 per Page 187 Pytlik and Myers Pytlik:JSC page.qxd 26/04/2010 13:56 Page 187
  9. 9. cent) involved financial fraud or public company reporting violations; 511 (over 25 per cent) involved fraud or other misconduct by broker-dealers, investment advisers, or transfer agents; 330 (over 16 per cent) involved fraudulent or unregistered offerings; and 272 (over 13 per cent) involved insider trading or market manipulation. Other traditional programme areas include delinquent filings and municipal offerings. As part of these cases, the SEC has sued among others, public companies, corporate officers, auditors and audit firms, attorneys, broker-dealers, investment advisers, and self-regulatory organisations under the SEC’s purview. (2) Khuzami, R. (2009), Speech by SEC Staff: Remarks at Press Conference, SEC Division of Enforcement, SEC, 16th October. http://www.sec.gov/news/ speech/2009/spch101609rk.htm. (3) Rodier, M. ‘Insider Trading — Can Insider Trading Be Stopped’,Wall Street and Technology. In what has been termed the biggest insider trading ring in a generation, the SEC recently brought cases against the founder of the Galleon Group hedge fund and former directors at a Bear Stearns hedge fund. In a series of interviews, Senior Editor Melanie Rodier spoke with Larry Tabb, founder and CEO of TABB Group, and Yvonne Pytlik, managing partner, Global Compliance Risk Management Corp., about what processes and technology financial firms can use to stop insider trading. http://www.globalcompliance risk.com/index.php/news. (4) President’s Obama ‘Financial Regulatory Reform’ and the US Regulators are further imposing higher regulatory standards and best practices to guide ‘Financial Services Industry in implementing Risk Management and Compliance Programs’. President Obama’s Plan for Financial Regulatory Reform. See generally, Draft of the Restoring American Financial Stability Act, as introduced to the US Senate on 15th March, 2010, and predecessor drafts. (5) See ref. 3. (6) Ibid. (7) See ref. 1. (8) Ibid. (9) See ref. 2. (10) See ref. 3. (11) October 2009, Senior Supervisors Group issued the ‘Risk Management Lessons from the Global Banking Crisis of 2008’, which concludes that there are four risk practices critical to achieve a balance of the effective enterprise risk management and banks performance in the financial crisis: Effective firm-wide risk identification and analysis; Consistent application of independent and rigorous valuation practices across the firm; Effective management of funding liquidity, capital, and the balance sheet; and Informative and responsive risk measurement and management reporting, http://www.sec.gov/news/ press/2009/report102109.pdf. (12) See ref. 4. (13) See ref. 3. (14) Ibid. (15) See ref. 2. (16) Ibid. (17) Litigation Release No. 21407/4th February, 2010. Securities and Exchange Commission v. Bank of America Corporation, Civil Action Nos. 09-6829, 10-0215 (S.D.N.Y). Bank Of America Agrees to Pay US$150m to Settle SEC Charges. SEC Charges State Street for ‘Misleading Investors About Subprime Mortgage Investments’. Boston-Based Firm to Settle Charges by Repaying Fund Investors More Than US$300m. ‘The Securities and Exchange Commission today charged Boston-based State Street Bank and Trust Company with misleading its investors about their exposure to subprime investments while selectively disclosing more complete information to specific investors’, http://www.sec.gov/ litigation/litreleases/2010/lr21407.htm. (18) See ref. 2. (19) See ref. 1. Compliance risk: A critical business risk for asset managers Page 188 Pytlik:JSC page.qxd 26/04/2010 13:56 Page 188
  10. 10. Page 189 Pytlik and Myers (20) Ibid. (21) See ref. 2. (22) See ref. 3. (23) Ibid. (24) Ibid. (25) President’s Working Group on Financial Markets (PWG) (2008) The Asset Management Committee (‘AMC’) released best practices for Hedge Fund Industry (‘AMC Report’), http://amaicmte.org/Public/AMC%20 Report%20-%20Final.pdf. (26) Managed Funds Association (2009), ‘Sound Practices for Hedge Funds’, released 31st March, http://www. managedfunds.org/mfas-sound-practices -for-hedge-fund-managers.asp. (27) See ref. 25. (28) President’s Working Group on Financial Markets (PWG) (2008) Investors Committee (‘IC Report’) issued Principles and Practices for Hedge Fund Investors, http://amaicmte.org/Public/ Investors%20Report%20-%20Final.pdf. (29) ‘2010 and Beyond — Chief Compliance Officer Compliance Programme’ — New Regulatory Requirements and Best Practices, http://www.global compliancerisk.com/pdfs/PytlikAuthor September2009F.pdf. (30) See ref. 1. (31) See ref. 2. (32) See ref. 3. (33) See ref. 26. (34) See ref. 25. (35) See ref. 28. (36) See ref. 1. (37) See ref. 2. (38) See ref. 3. (39) See ref. 1. (40) See ref. 2. (41) See ref. 3. Pytlik:JSC page.qxd 26/04/2010 13:56 Page 189

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