FSA Boost Enforcement

Happy New Year!Compliance Reporter will not bepublishing next Monday. Your next issuewill appear Jan. 7. We wish all ourreaders Happy Holidays!

SEC May Blunt SocialNetwork QueriesThe Securities and ExchangeCommission’s Office of ComplianceInspections and Examinations may tonedown questions about the socialnetworks of fund firm insiders.

See story, page 2

In The NewsMFA Questions Best Practice Paper 3CESR Consults On GAAP 4Grant Thornton Pans 404 Delay 4

Annual Outlook & ReviewSEC’s Richards Hails CCO Shift 7Firms Seek Tech Solutions 7Dubai To Open To Retail 9Regulators Eye Valuation 9Fund CCOs Hope For Guidance 10Industry Queries Reporting Forecast 10The Year At A Glance 11Year-End Quiz 12

DepartmentsRegulatory Alert 14Bar Stool 16

DECEMBER 24, 2007VOL. XIV, NO. 51

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FSA TO BOOST ENFORCEMENT DIVISIONThe U.K. Financial Services Authority is planning to add between 30and 50 new staff to its enforcement division with many joining by theend of the first quarter. Most of the new recruits will have criminal andforensic investigation expertise to help with market misconduct cases,according to Margaret Cole, director of enforcement at the FSA.

The hiring program comes on the heels of wide-ranging restructuringin the FSA enforcement team (CR, 6/4). “Our headcount was originallyin the region of 280. It’s currently around 200 and we expect it to go

up again because we are now recruiting for some of the additional skills we need,” Coletold CR. —Daniele Ihns

For the full interview with Margaret Cole please see page 5.

In The Firing LineTOUGH TIMES CREATE UNCERTAINTY ONCOMPLIANCE SPENDINGCompliance leaders at many U.S. financial institutions and public companies faceuncertainty over how much they will be able to spend in the coming year as theirorganizations react to economic problems.

Although most compliance budgets were set in the fall, industry professionals say somedepartments are likely to face pressure to limit how much they spend in 2008. HenryCarter, chief compliance officer at San Francisco-based Global Crown Capital, said he hasseen a number of firms with compliance vacancies failing to make recruitment decisions.

(continued on page 16)

AML STAFF A PRIORITY FOR 2008Anti-money laundering professionals will be the top recruiting focus for financial institutionsin 2008, despite pressure on compliance budgets.

Steven Beattie, principal with Ernst & Young in New York, said broker/dealers next yearwill in particular feel the pressure to shore up AML programs as regulators pay moreattention to whether firms are complying with rules that came into effect in 2003. “I thinkwe will see much less tolerance for not having a fully effective program.”

The B/Ds themselves were reluctant to talk. Indeed, calls to JP Morgan, LehmanBrothers, CIBC World Markets, Instinet and others were either not returned or officialsdeclined to comment.

Beattie said firms have been going through a constructive period of working with the(continued on page 16)

Annual Outlook & Review

Margaret Cole

CR122407 12/20/07 12:38 PM Page 1

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©Institutional Investor News 2007. Reproduction requires publisher’s prior permission.2

Nasdaq Adds FINRA Reporting FeesThe Nasdaq Stock Market has decided to add fees for registration, transfer, re-licensing and reporting representatives’ misdeeds to the Financial IndustryRegulatory Authority to its annual membership charges.

Until now, Nasdaq has only charged about $3,000 a year for membership fees,but avoided charging registered representatives. Now, it will be charging $55 for eachtime it has to handle members’ regulatory matters with FINRA. Officials explainedthe change by pointing out that Nasdaq’s planned projects—namely, its drive toincrease New York Stock Exchange-listed market share and the pending launch of itsoptions market—demand that the exchange does not take on additional costs.

“Both of these events create additional regulation expense that must besupported. Nasdaq believes that the new fees are warranted to ensure that fees forregistered representatives fund a portion of regulating the Nasdaq market,”officials wrote in a related rule filing.

Traders do not expect the fees to significantly add to most firms’ costs. Mostother exchanges pass all external regulatory charges to the traders.

Who Do You Know?SEC May Tone Down Social Network QuestionsThe Securities and Exchange Commission’s Office of Compliance Inspections andExaminations may blunt its demands for information about the social networks offund company insiders, according to John Walsh, chief counsel of OCIE.

Speaking at an Investment Company Institute meeting earlier this month,Walsh said a new letter for use nationwide is being drafted that is only half the sizeof the voluminous request form released by the New York Regional Office earlierthis year and some of the troublesome questions will be dropped entirely. Whenasked by CR sister publication Fund Action, Walsh added that the new letterwould, for example, drop a question about proposals that compliance rejected.

The New York office letter asked questions including, “Do you have relativesworking for broker/dealers?” Those who heard Walsh speak said that particularquestion would be scrapped. And unlike the New York office letter, responses tothe new letter may be oral rather than in writing.

The 27-page New York document request list for asset management firms,released over the summer, beefed up requests for information on firms’ investmentsand certain strategies, such as derivatives and private investment in public equity.

Gene Gohlke, associate director at OCIE, said the updated version of the NewYork Office’s letter is expected in a month or two. “There’s not going to be apublic announcement,” he said. “People will not know when it goes into effect;examiners will just start using it.”

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Dutch Regulator Signs IOSCO AgreementThe Dutch securities regulator, the Authority for the FinancialMarkets, has become a full signatory to the InternationalOrganization of Securities Commissions. The AFM announcedon Dec. 12 that it had endorsed IOSCO’s MultilateralMemorandum of Understanding, which is designed tostrengthen ties between regulators, including enhancedcooperation on detecting and combating cross-border violationsof financial laws. According to the AFM, 44 IOSCO membershave signed up to the agreement, with the aim that all 130members will become full signatories by 2010.

Drea Berghorst, spokeswoman for the AFM, said that beforeentering into the agreement a regulator must prove that it meetsIOSCO’s standards and can ensure that the provisions of theMMoU are complied with. The Netherlands satisfied IOSCO’srequirements following the introduction of the Act on FinancialSupervision in January 2007, Berghorst added.

MFA Criticizes Best PracticeConsultation Paper

The U.S. Managed Funds Association hascriticized the U.K. Hedge Fund WorkingGroup’s recent consultation paper on bestpractices as being too restrictive. In a Dec. 14comment letter the MFA stated that while itagreed with the principles underlying many ofthe recommendations in the Working Group’spaper it believes that some of the

recommendations are too specific and prescriptive. This wouldmake it impractical or impossible for many hedge fund managersto adopt those recommendations, the MFA wrote.

The MFA stated that it agreed with what it called theWorking Group’s support for recommended sound practicesbeing applied globally. It added: “We believe that the focus ofglobal recommendations should be on ensuring that hedge fundmanagers address identified issues in a meaningful manner ratherthan on prescribing the particular means of implementing thoserecommendations.”

The MFA, which in November updated its “Sound Practices ForHedge Fund Managers” (CR, 12/10), wrote that any set of globalsound practices should be tailored to address the variety of businessmodels within and jurisdictional requirements applicable to thehedge fund industry. It also offered suggestions for the WorkingGroup, such as that the paper include a list of U.S. regulatoryreporting requirements, which it said would be particularly useful

for smaller hedge fund managers without large compliance teams.Jack Gaine, president of the MFA, said: “We congratulate the

Working Group for contributing to the global effort to developsound practices for the hedge fund industry. We look forward toworking with them and the President’s Working Group to developa truly global set of sound practices for the hedge fund industry.”The Working Group did not respond to a request for comment.

FSA, Consob Sign Cooperation Agreement

The U.K. Financial Services Authority andthe Italian securities regulator CommissioneNazionale per le Società e la Borsa havesigned a Memorandum of Understandingregarding the supervision of the London StockExchange and the Borsa Italiana. The twoexchanges merged Oct. 1 and will continue tobe regulated in their home jurisdictions, but

the MoU establishes a framework for cooperation in oversight andsupervision by the FSA and Consob. FSA Chairman CallumMcCarthy said the arrangement will help in the exchange ofinformation between the regulators as part of their respectiveday-to-day supervision of the LSE and the Borsa Italiana.

Organizations Align Info Security, RiskOrganizations are increasingly aligning information securitymore closely with their risk programs, according to a surveyreleased by Ernst & Young earlier this month. The study foundthat 29% of organizations have fully integrated informationsecurity with risk management, up from just 15% a year ago.

On the flip side, however, the survey found that informationsecurity is often isolated from management and decision-makingprocesses within companies. Although the involvement ofinformation security teams with business unit leaders andcorporate officers is on the rise, almost a third of respondents saidthey never meet with the board or audit committee.

Despite a growing recognition of the importance ofinformation technology as part of compliance work, the studyfound that many organizations are struggling to find the correctstaff. “This issue won’t go away any time soon and managementneeds to investigate alternative staffing options. This meanslooking to parts of the organization, such as internal audit, to fillgaps,” said Ed Napoleon of Ernst & Young.

Ernst & Young polled almost 1,300 senior executives in morethan 50 countries between May and August.

In The News

Jack Gaine

Callum McCarthy

CR122407 12/20/07 12:38 PM Page 3



Mind The GAAPCESR Consults On GAAP EquivalenceThe Committee of European Securities Regulators last week issueda consultation paper on the equivalence of Chinese, Japanese andU.S. generally accepted accounting principles. The aim of theexercise is to help CESR give the European Commission technicaladvice on the equivalence of third country GAAP under theProspectus and Transparency Directives by July 1, 2008.

According to the CESR paper, its current advice on the threecountries GAAP is:

• U.S. GAAP should be treated as equivalent toInternational Financial Reporting Standards for use onEU markets, given that the two sets of standards areconverging and will continue to evolve to the point wherethey are effectively equivalent.

• Japanese GAAP should be considered equivalent to IFRSby June 2008, unless there is not sufficient evidence ofthe Accounting Standard Board of Japan having met thetimetable set out in the Tokyo Agreement to accelerateconvergence between Japanese GAAP and IFRS.

• A final decision on Chinese GAAP should be postponed.CESR concluded that, on the basis of a technical analysisof the standards alone, Chinese GAAP could qualify asequivalent to IFRS. However, it found that there is stillno evidence available concerning the concreteimplementation of accounting standards in China.

The closing date for consultation is February 25. CESR willalso be holding an open hearing on Jan. 21 to discuss the issuesraised with interested stakeholders.

Grant Thornton Disputes 404 DelayGrant Thornton has criticized a proposal tofurther delay the implementation of Section404 of Sarbanes-Oxley for smaller companies.Securities and Exchange CommissionChairman Christopher Cox this monthannounced that he intends to ask theCommission to put back the compliance datefor issuers with less than $75 million in public

capitalization by one year to years ending on Dec. 15, 2009. Smallcompanies have already been saved from having to comply with404 several times, but Cox said he wants to see the analysis of acost-benefit study before pushing ahead with the rules, adding thathe expects the study to be complete no earlier than June 2008.

Grant Thornton released a statement in which it described theproposed delay as neither necessary nor prudent. The firm

argued that few smaller issuers have taken advantage of earlierdeferrals to get ready to comply with 404, which requiresregistered companies to give an auditor-attested report on theirinternal controls over financial reporting. This will underminethe SEC’s ability to gather useful data for its survey since fewcompanies will have fully implemented the rules, the firm stated.

Grant Thornton stated that studies have indicated that smallercompanies are in the greatest need of improvements to theirinternal control systems. Introducing a further delay will increasecompanies’ expectations that they will ultimately never have tocomply and therefore will reduce their willingness to improvetheir internal controls, the firm wrote.

SEC spokesman John Heine said the agency does notcomment on comment letters.

IAA Warns On Shift To Rules-BasedRegulationThe Investment Adviser Association said it was concerned aboutwhat it described as an increasingly rules-based approach toregulation. The IAA was writing in response to a request fromthe Department of the Treasury for input on how, if at all, theU.S. regulatory regime should be changed (CR, 11/19). Theconsultation period closed last month.

In its letter, the IAA said: “Legal, regulatory and compliancerequirements for investment adviser firms have increaseddramatically over the last several years. Many of these newrequirements have substituted rules-based, ‘command and control’regulation in practice for pre-existing principles-based regulation.”

The shift to rules-based regulation is particularly evident withregard to the Securities and Exchange Commission’sexamination process, the IAA continued. Deficiency letters issuedby the SEC’s Office of Compliance Inspections andExaminations have been used as a means to require firms toadopt practices that are not clearly based on previouslyarticulated rules and regulations, the group said. “The SEC mustendeavor to communicate legal requirements and standards toinvestment advisers separately from the examination process,preferably after a process that includes appropriate notice andopportunity to comment.” John Heine, a spokesman for theSEC, declined to comment.

Neil Simon, v.p. for government relations at the IAA, addedthat the group feels the SEC should remain the primary U.S.financial regulator. The Advisers Act remains sound and is the“appropriate means of regulating the investment adviserprofession,” he said.

Jennifer Zuccarelli, a spokeswoman for the Treasury, told CRthe group’s comments will be taken into consideration.

In The News (cont’d)

Christopher Cox

CR122407 12/20/07 12:38 PM Page 4



Margaret ColeFinancial Services Authority

Margaret Cole, director of enforcement at the U.K. FinancialServices Authority, recently sat down with CR to talk about therestructuring of the division, bringing actions against seniormanagement and dealing with investigations.

CR: What are your priorities for 2008 in terms of enforcement?MC: In the wholesale area, market conduct and the broadagenda of Treating Costumers Fairly are our main priorities.There will be different work streams under [these areas with] thewhole point being to support the rest of the organization in itsbusiness priorities.

CR: The TCF initiative comes into effect in March. You’vesaid in the past that the FSA will be tough on firms if they’renot ready to comply in time. Do you expect firms to be readyand what steps will you be taking to crack down on any thatfall behind? MC: We certainly hope most firms are ready by now but as youknow there will be a final deadline for TCF in December 2008.At that point they will have to be able to demonstrate significantimprovements in their treating costumers fairly culture. Thatmeans, I believe, we will be taking more enforcement action inrelation to firms that cannot demonstrate that to us.

CR: You talked last year about bringing more criminal cases. Howmany were brought in 2007 and will this continue to be a focus?MC: It will continue to be a focus. We did bring some criminalcases in 2007, some in the area of fraud. We have indicated that weintend to use our criminal powers in the insider dealing area [and] Iwould expect you to see activity in that area in the coming year.

CR: Some compliance officers are skeptical about whether theFSA’s principles-based approach will work unless more focus isplaced on senior management. Do you agree? MC: I understand why compliance officers are concerned andfeel that cases against senior management will have a deepimpact. Clearly we think that as well, which is why we look at itin every single case that we have. But we can only bring thosecases if two things are there: one is if it is consistent with ourarticulated policy, and we said that we won’t bring cases unless

the person in knowingly involved, and [second if ] the evidenceagainst that individual allows us to bring the case.

CR: Can you give me an update on the restructuring of theenforcement division? MC: We had a look at the enforcement division and decidedwhat would be the right structure, the right number and the rightskills going forward. We have carried out a selection process basedon the skills we think we need at all levels of the division. Thathas meant that we have had some redundancies. Our headcountwas originally in the region of 280; it’s currently around 200 andwe expect it to go up again because we are now recruiting forsome of the additional skills we need.

CR: Which skills are you looking for?MC: Criminal expertise, for example, and more forensicinvestigation expertise. We expect, based on current scope ofactivity, for [the headcount] to go up again to, probably, between230 and 250; depending on some pieces of work. We arerecruiting actively now and expect to have a chunk of the peoplewe are looking for by the end of the first quarter of next year. Wehave had a huge number, hundreds, of applicants for our lawyerand investigator positions.

CR: What changes would you like to see in how firms respondto FSA probes and enforcement actions?MC: That’s a good question. We want to see firms really engagingwith us in a meaningful way when there is an enforcement case.The first thing we do is talk to the firm and sit down with them,scope out with them the sort of work that we will be doing. Weneed positive engagement and understanding about what it isthat we are doing and, obviously, cooperation, early information,access to the right people in a timely fashion to get the evidence.We are happy to engage with firms who want to provide theirown reports to us.

We will take into account the work that the firms want to dothemselves, and we will also do our own work. Importantly, firmshave to help us establish the facts and if firms want to engage inthe settlement process we have to see some proactive intentionsfrom them in that regard.

CR: Do you often get that response? MC: Yes, very often we do. People take dealing with the FSA veryseriously, as they should. There is a significant advantage indealing with us in a cooperative fashion. It will certainly make adifference to the penalty and, if it gets to that stage, it will make adifference in what we are prepared to publish about thecooperation we have got. Also for firms that want to get to theend of something they know has gone wrong quickly and moveon it’s far better if they put their hands up to the wrongdoing.

R E G U L A T O R YQ & A

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A Seat At The TableSEC’s Richards Hails CCO Evolution

Lori Richards, director of the Securities andExchange Commission’s Office ofCompliance Inspections and Examinations,has welcomed what she described as thegrowing status of compliance officers acrossthe financial services industry over thelast year.

Richards told CR that the agency hasnoticed firms beginning to invite chief compliance officers toimportant meetings with senior management to discuss internalstrategies and other developments, adding that this has solidifiedthe role of CCOs. “The subprime crisis and the challenges tovaluation [of assets in hedge fund portfolios] made it clear thatcompliance professionals are indispensable to the industry.”

Richards said that, by beginning to consider CCOs to be amore integral part of the organization and including them indecision-making, firms have developed more qualified and betterskilled compliance teams.

Looking forward to 2008, Richards said insider tradingwill continue to be a top focus for the SEC. She addedthat the valuation of illiquid instruments and ensuringseniors are dealt with fairly will also be among theCommission’s chief concerns.

Richards said the SEC will try to improve the way itcommunicates what inspectors are seeing in exams through itsCCOutreach program and compliance alerts. The next alert isplanned for release in January. She added that she has alsonoticed a normalization in exam findings during 2007. “Wedidn’t have huge industry scandals like market timing,” she said.“Violations were more on an individual basis. Not that theyweren’t serious, just not industry-wide.”



Lori Richards

Firms Seek Answers In TechnologyCompliance professionals next year will be stepping up their useof technological solutions on issues ranging from financialreporting to corruption.

Unlike in the anti-money laundering field, until now mostorganizations have relied on manual procedures to make surethat they don’t fall foul of rules on bribery and corruptionat their foreign branches. But organizations areexpected to start adopting more technologicalapproaches to their Foreign CorruptPractices Act programs, even thoughdoing so raises a number of challenges.

Tim Hedley, partner with KPMG inNew York, said using technology tomonitor for FCPA risks and violationsis complicated because it requiressystems to search across multiplelanguages, currencies and locations forsuspicious payments. Programs also haveto take account of different practices in thejurisdictions where the company operates,Hedley added.

No system will be able to monitor all payments across theorganization so companies will need to target areas where theymost expect to see suspicious payments, said Edward Rial,principal with Deloitte Financial Advisory Services in NewYork. Despite the complexities of implementing automatedFCPA systems, however, Rial said the cost should be in line withother compliance efforts.

Companies won’t be able to automate their FCPA programs

as fully as their AML or Office of Foreign Assets Controlequivalents, but there is a need to move in that direction, saidJudith Lee, partner with Gibson Dunn & Crutcher inWashington, D.C. Operating systems entirely by hand is veryexpensive and often needs to be outsourced to law or auditfirms, she said, adding that automating FCPA checks raises

privacy issues.Issuers also will be preparing to file reports with the

Securities and Exchange Commission in new,more searchable ways. SEC Chairman

Christopher Cox has made improvingcommunications with investors a keyaspect of his time at the agency andhas been a strong advocate of usinginteractive data through eXensibleBusiness Reporting Language, or

XBRL, in filings with the Commission. Many continue to be oblivious to the

technology, with only 53% of CFOs andsenior controllers saying they had heard of

XBRL in a recent Grant Thornton poll. Butmany industry professionals expect new rules

making XBRL compulsory at least to be proposed during2008. Doing so will create a range of new risks for issuers asindividuals will be able to rate companies in new ways,according to Trent Gazzaway, managing partner for corporategovernance at Grant Thornton in Charlotte, N.C. “It will makeauditors and analysts out of a whole army of people.” Gazzawaypointed to the wave of stock options probes, which was sparkedinitially by an academic study.

CR122407 12/20/07 12:38 PM Page 7

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Due Diligence.



‘MiFID’ In The Middle EastDFSA Finds Inspiration In EU, Islamic Law

The Dubai Financial Services Authority isplanning to open the doors to retail investorsin the New Year alongside new clientprotection rules inspired by the Markets inFinancial Instruments Directive.

David Knott, CEO at the DFSA, told CRthat the new rules are under consultationand will prepare the ground for increasing

client access to the Dubai International Financial Center. At the moment, firms using the Center are only able to offer

Dubai-listed securities to professional clients who have at least$1 million in liquid assets. Under the proposals, that thresholdwould be removed.

“This will be a very significant change for the Center if itgoes ahead,” said Knott. In order to accommodate retailclients, the regulator has had to address a number of regulatoryissues, including client classification, Knott said. “We havetaken into account what has been happening in Europe withMiFID and the way they deal with the difference between

professional and retail clients, which is different to way wehave been doing it.”

Among the proposals are heightened disclosure requirementsthat firms must make to retail clients in terms of products andincreased know-your-client responsibilities, as well asrequirements to make sure that products are suitable. Each ofthese reflect similar rules under MiFID.

The DFSA is growing in size and importance as the localmarket develops. This year, up to November, the regulatorlicensed more than 200 firms. “It took almost three years totake the first 100 firms. This large increase in numbers givesyou an idea of momentum,” Knott said.

Another highlight for the DFSA this year was the signing ofan agreement with the Malaysian Securities Commission thatwill streamline the selling of Shariah-compliant funds betweenthe two jurisdictions.

Knott said that Islamic finance is no longer the preserve ofIslamic financial institutions and is being recognized as anexciting opportunity in many jurisdictions. He added that theDFSA recently met with representatives of the U.K. FinancialServices Authority to discuss the way the DFSA manages itsIslamic Finance Regulation as the FSA develops its ownframework.

EuropeRegulators Look To Valuation Practices

Regulatory authorities in Europe are turningtheir attention to the formal valuationsbanks provide for clients’ investmentportfolios. Margaret Cole, director ofenforcement at the U.K. Financial ServicesAuthority, in November said the FSAregards the implementation andmaintenance of valuation systems as essential

to maintaining confidence in the financial system.Also in November, the FSA’s Capital Markets Team released

examples of best practices on formal valuations banks provideto their clients (CR, 11/26). A study carried out by the teamfound that banks have seen an increase of 250% over the lastyear in the number of positions they have valued for clients.According to the FSA, the demand for independent valuationshas been driven by changes in accounting standards such as theU.S. Financial Accounting Standards Board’s Statement ofFinancial Accounting Standard 157, which became effective forpublic companies’ fiscal years beginning from Nov. 15. The

standard details how to calculate the fair—or market—value ofassets and liabilities.

Antony Whitehouse, head of compliance at Calyon CréditAgricole in London, said he expects valuations to be high onthe agenda of many regulators in 2008.

Improving valuations standards for complex financialinstruments was set as one of the priorities of the EuropeanUnion when it looks for lessons from the global creditcrunch, according to Charlie McCreevy, EuropeanCommissioner for Internal Market and Services. In a speechto the Kuwait Global Forum on Dec. 18, McCreevy said thatmuch of the proposed work in this area is already inthe pipeline.

The Global Public Policy Committee also issued a paperDec. 13 on how to determine the fair value of financialinstruments under International Financial Reporting Standardsin the current markets conditions.

Liz Murrall, senior adviser for corporate governance atthe Investment Management Association in London,welcomed the paper’s guidance. “In [the current market]situation there is bound to be considerable uncertaintyaround valuations and the need to secure uniform standards isever more important.”

David Knott

Charlie McCreevy

Annual Outlook & Review (cont’d)

CR122407 12/20/07 12:38 PM Page 9



Investment ManagementFund CCOs Look For Guidance In ’08

Chief compliance officers at assetmanagement firms expect 2008 to bringguidance on electronic recordkeeping, softdollars and what responsibilities fund boarddirectors can delegate to CCOs. They alsoexpect firms to continue implementing newcompliance technologies.

Lane Bucklan, CCO at Westport, Conn.-based Iridian Asset Management, predicted that the Securitiesand Exchange Commission will update Form ADV Part II in thenext year, adding: “They keep saying they are getting close.”Steven Yadegari, CCO and general counsel to Cramer RosenthalMcGlynn told CR that firms are expecting to see more guidancein a number of areas from regulators in 2008, including onrecordkeeping obligations and anti-money laundering practices.

Yadegari said another area CCOs are seeking guidance on issoft dollar arrangements. “We have seen indications that furtherguidance will be provided in the first or second quarter of nextyear, but that’s probably an area that will be on the list for a

while.” An SEC official recently announced that the issue datefor a transparency release outlining guidance to fund boarddirectors on soft dollar practices has been pushed back to the firstquarter of next year (CR, 11/26).

Guidance on soft dollars may come at the expense of anoutright bar on such arrangements. According to CR sisterpublication Fund Action, SEC Chairman Christopher Cox ispreparing to accept that he cannot bring an end to softdollars and will instead launch an initiative that will solidify theirrole in market pricing by coaching fund boards on how to policesoft dollars for potential conflicts of interest (CR, 11/19).

What compliance roles, if any, fund board of directors shoulddelegate to the CCOs of funds will also be an issue in 2008,according to Yadegari. He added that the role of CCOs at fundfirms is still relatively new and changing. “2008 will be a definingyear of further evolution and clarification of the appropriate roleand involvement of a CCO in the advisory and fund business.”

Bucklan added that firms will continue to integrate newsoftware products in 2008. “A lot of firms are being forced toautomate,” he said. “These are great tools to have when the SECcomes because it shows you are invested and you are taking yourcompliance responsibilities seriously.”

Lightening The Load?CCOs Question FSA Forecast Of Less ReportingU.K. compliance professionals are skeptical about predictionsthat they will have to file less information in 2008. According tothe U.K. Financial Services Authority, banks and securities firmsshould see an average decrease of 50% in the amount of datathey have to report to the regulator next year.

The FSA made the announcement earlier this month as partof an update of its Simplification Plan, which seeks to lower theadministrative burden on firms by shifting toward a principles-based approach. The FSA’s shift away from a rules-based systemhas continued in 2007 as the regulator has made several changesto its conduct of business rules as proposed last year under the“radical simplification” plan (CR, 11/04/2006).

A compliance officer at an Israeli bank in London said thatalthough the FSA is taking steps to reduce the reporting burden,the amount of data he has to report has gone up significantly inthe past three years. This was partly due to new EU regulations,he said. He welcomed the FSA initiative, however. “It is a goodthing that the FSA is trying to simplify the regime; it’ll perhapsbring things back to normal,” he said.

In the past year, firms in the U.K. have had to set up expensive

data reporting systems to cope with the new requirements,particularly with regard to the Markets in Financial InstrumentsDirective that came into force Nov. 1. A chief compliance officerat a major U.K. retail bank said that once these systems are set upand able to process high volumes of data it does not make adifference if a firm eventually has to report less information. “It’slike spending money to set up an oil pipe and then not using it toits full capacity; the cost of administrating it does not change.”

Paul Willis, head of compliance at Fortis, said he has seen somereductions in reporting burdens this year but criticized the FSA fornot disclosing the increased cost of certain rules. For example, hesaid, “the change to [operating under] MiFID has meant increasedtransaction reporting fees to FSA due to the loss of the broadercapability to report via exchanges.” FSA spokesman AdamRichards-Gray acknowledged that transaction reporting costs haveincreased under MiFID, but said the FSA had drawn attention tothe potential costs in a July 2006 publication and that thewithdrawal of the overseas exchange exemption was a MiFIDrequirement and not part of any FSA super-equivalence.

Robin Gordon-Walker, an FSA spokesman, said thatalthough there may be increases in the reporting burden in someareas, the 45% reduction figure for banks and 55% decrease forsecurities firms were based on detailed work carried out by theregulator. “When we publish a figure we stand by it,” he added.

Steven Yadegari

Annual Outlook & Review (cont’d)

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JANUARY

Annual Outlook & Review — The Year At A Glance

Ethiopis Tafara, director of the Securities andExchange Commission’s Office of InternationalAffairs, released an article proposing that foreignbroker/dealers be able to operate in the U.S. withouthaving to register with the agency.

Meanwhile, the U.K. Financial ServicesAuthority proposed increasing the penalties it canimpose on wealthy individuals, a position it laterbacked away from.

FEBRUARYThe FSA opted to go beyond the requirements ofthe Markets in Financial Instruments Directive insix areas.

MARCHThe SEC was planning to bring its first action for analleged violation of the customer privacy ruleRegulation S-P.

Meanwhile, the FSA was looking to cut up to20% of its enforcement staff as part of arestructuring (see story, page 1).

APRILSalaries for senior compliance officers at U.K.investment banks soaredin the first quarter ofthe year, with onestudy finding thatfirms were offeringbasic salaries forsenior staff atrates more than 20% higher thanthey had been in the last quarter of 2006.

MAYFirms were fuming over a letter from the NASD’sAmerican Stock Exchange division asking forRegulation NMS information prior to the Julyimplementation deadline that appeared tocontradict assurances from the SEC that requestsfor information would be limited mainly toprocedural matters.

JUNEThe NASD, now the Financial IndustryRegulatory Authority, was investigating a dozenor more broker/dealers for providing inaccuratetrading data on blue sheets following an earliertargeted sweep. The self-regulatory organizationwas also looking into so-called hedge fund hotels.

JULYGene Gohlke, associate director in the Office ofCompliance Inspections and Examinations at theSEC, told CR that the key concerns raised by theturmoil resulting from problems in the subprimemortgage sector centered on valuation and liquidity.

AUGUSTCR reported that international banks, faced with alack of local qualified staff, were transferringemployees from Asian countries with moredeveloped regulatory regimes to build complianceteams in their Chinese branches.

SEPTEMBERAlmost 60% of asset management firms werefound to be failing to test for compliance on insidertrading. According to a study by consulting firmACA Compliance, 85% of firmshad not carried out an insidertrading risk assessment.

OCTOBERCR reported that many asset managers are unsurewhich temporary and contract staff should be boundby their codes of ethics to remain in compliancewith a controversial new document request listfrom the SEC’s New York Regional Office.

NOVEMBERAfter years of preparation MiFID finally came intoeffect—with surprisingly few hitches. A number ofmajor banks opted forsecond tier classificationunder the directive.Although it had beenexpected that theywould do so for theirasset management arms,many instead decided to seekthe status for their banks as a whole.

DECEMBERThe FSA secured victory in the early battles overhome-host arrangements under MiFID. CR reportedthat the regulator had reached agreements with atleast three European counterparts that U.K. conductof business rules will apply to branches in the U.K.regardless of the location of their clients.

CR122407 12/20/07 12:38 PM Page 11


Year-End QuizHave you been paying attention? Here are some questions from theyear in compliance.

1. Which Wall Street firm took the unusual step of askingconvicted criminals to help with its insider trading preventionprogram?

A. Merrill LynchB. Goldman SachsC. Morgan Stanley

2. Which sports star was reportedto be considering listing himself onthe London Stock Exchange?

A. Alex RodriguezB. Lewis HamiltonC. David Beckham

3. In a recent poll, howmany CFOs and seniorexecutives said they wereaware of XBRL?

A. 27%B. 53%C. 76%

4. How many pages long was thedocument request list released bySecurities and ExchangeCommission’s New York RegionalOffice this summer?

A. 27B. 15C. 42

5. What was the estimated monthly earning potential of theURL www.compliance.com?

A. $58

B. $112C. $526

6. And what was the estimated monthly value ofwww.brokerdealer.com?

A. $58B. $112C. $526

7. Which state introduced a proposal that, if adopted, wouldforce certain hedge fund advisers to register unless they

opt to register with the SEC?A. Massachusetts

B. New YorkC. California

8. Who recorded a song inhonor of the fifthanniversary of Sarbanes-Oxley?

A. Colin CFO AndThe CCOs

B. The SOX-y BoysC. The Singing CPA

9. Some London-basedlawyers were reported to becharging what hourly rate toclients?

A. £1,000 ($2,021)B. £1,500

C. £2,000

10. Which SEC official jokinglypredicted that the agency might sell the

naming rights to its Washington, D.C. headquarters?A. Erik SirriB. Paul AtkinsC. John White


Answers: 1-C, 2-B, 3-B, 4-A, 5-B, 6-A, 7-C, 8-C, 9-A, 10-B

NOW GET compliance reporter EVERY FRIDAY!

Paid subscribers now have access to a PDF of the upcoming Monday’s newsletter

on CR’s Web site every Friday afternoon before 5 p.m. EDT. That’s a 64 hour

jump on mail delivery, even when the post office is on time! Read the news

online at your desk or print out a copy to read at your leisure over the

weekend. Either way, you’ll be getting our breaking news even sooner and

starting your week off fully informed!

CR122407 12/20/07 12:38 PM Page 12



Quotes Of The YearIn another dramatic year for compliance, regulators, lawyers,auditors, recruiters and compliance officers took time out toshare their thoughts on the events that shaped the industry.Here’s a sample of some of their best comments.

“We all must be careful not to set up the CCO for failure by heapingtoo many responsibilities on his or her shoulders.”—AndrewDonohue, director of the Securities and ExchangeCommission’s Division of Investment Management, on SEC plans toexamine which functions mutual fund boards can delegate to chiefcompliance officers.

“People are concerned with getting the facts right, but if a firm iscoming to us early, we understand that all the facts might not bethere.”—Linda Thomsen, director of the SEC’s Division ofEnforcement, on the growing number of self-reporting firms.

“People need to be more careful of what they say.”—StevenFelsenthal, CCO at New York-based Millburn RidgefieldCorporation, on a case reminding firms that informal arrangementscan be legally binding.

“The level of attack is incredible. Remember ‘War Games’? That is so1980s.”—John Walsh, chief counsel in the SEC’s Office ofCompliance Inspections and Examinations, on the growing threat ofhacking to small firms.

“We’re not going to solve this problem by taking a lake and filling itup with water.”—Public Company Accounting OversightBoard member Charles Niemeier on plans to move toward fairvalue and international accounting standards.

“Organizations need to instill a culture where small mistakes aretreated as seriously as big ones.”—Dr. Francesca Gino of theTepper School of Business at Carnegie Mellon University onthe dangers of a slippery slope toward fraud.

“Next week I have a two-hour meeting with an investor over duediligence; that wouldn’t have happened a year ago.”—AshleighSwayze, CCO at Gleacher Fund Advisors, on the increased levelof investor due diligence in hedge funds.

“Everyone has this new toy and questions would be asked if thesenew powers were left on the shelf gathering dust.”—CarlosConceicao, partner at Clifford Chance in London, on Europeanregulators’ increasingly confident use of the Market Abuse Directive.

“If this decision is upheld it could lead to e-discovery anarchy.”—Sandra Jeskie, partner with Duane Morris in Philadelphia, Pa., ona Californian judge’s decision to order a Web site to retain randomaccess memory data.

“Sarbanes-Oxley has meant that in most cases the buck stopswith the audit committee.” —Laurie Smilan, partner atLatham & Watkins in Reston, Va., on attempts to share theworkload of audit committees.

“Such is the critical shortage of these people that you could standthem in a sandwich board by the window and have people lining upto hire them.”—Steve Maslow of Robert Walters on the highdemand for internal auditors.

“Most firms have so far focused on 80% of what we need to get done.Now the hard part’s the 20% that’s very specific—preferreds, ADRs,ETFs, and others the SEC will still need to address.”—MattLavicka, managing director of U.S. trading at Goldman Sachs onlast minute preparations for Regulation NMS.

“We can’t competitively disadvantage our own exchanges.”— ErikSirri, head of the SEC’s Division of Market Regulation, on a plan tospeed up the rule-making process for U.S. exchanges.

“If you want them to be a strategic officer then compensate them likeone.”—Mike Mungenast, CEO of ProEquities, on new ways ofpaying compliance officers.

“In today’s environment the stakes might be too high [not tosettle].”—Merri Jo Gillette, director of the SEC’s Midwest RegionalOffice, on the increasing percentage of SEC cases that are settled.

“All regulation should be derived from over-arching principles, butrules can provide guidance and specificity that the marketplacedesires.”—Annette Nazareth, member of the SEC, on the debateover rules- versus principles-based regulation.

“Hopefully we’ve just simplified their life a little.”—RichardKetchum, CEO of NYSE Regulation, on the merger with the NASD.

“Save the cheerleader, save the world.”—SEC Chairman ChristopherCox pays tribute to the agency’s Division of Enforcement whileintroducing this year’s SEC Speaks conference.

“There is no ‘R’ in GAAP.”—Conrad Hewitt, chief accountant at theSEC, on the need to remove what he described as unnecessarycomplexity in financial reporting.


CR122407 12/20/07 12:38 PM Page 13



North AmericaRegulator Date Topic Particulars Status

Securities and Exchange Dec-07 Real estate Proposed to amend Form S-11, which real estate entities use to register Comments due Jan. 22.Commission registrations offerings, to permit an entity that has filed at least one annual report and

that is current in its reporting obligations, to incorporate by reference into Form S-11 information from its previously filed Securities Exchange Act reports.

SEC Dec-07 Oil and gas Published concept release on possible revisions to disclosure Estimated comment duedisclosure requirements for oil and gas reserves, including posing questions on date Feb. 13.

whether to revise the proved reserves definition, such as the criteria used to assess reserves.

SEC Dec-07 Securities safe Adopted rule changes that include shortening the holding period requirement Becomes effective Feb. 15.harbor under Rule 144 under the Securities Act of 1933 to six months as part of a Comments regarding

safe harbor for the sale of securities under the exemption in Section 4(1). information collection dueJan. 16.

SEC Dec-07 Director elections Published interpretive and adopting release to clarify the meaning of the Becomes effective Jan. 10.exclusion for shareholder proposals related to the election of directors that is contained in Rule 14a-8(i)(8), which creates a procedure for shareholders.

SEC Dec-07 Interactive data Proposed computer labels encoded in eXtensible Business Reporting Comments due April 5.Language (XBRL) as a transformation to interactive financial reporting by public companies.

SEC Nov-07 Proxy rules Voted to adopt amendments to the federal proxy rules under the Securities Adopting release to be Exchange Act to clarify that participation in an electronic shareholder forum, published shortly.which could potentially constitute a solicitation subject to the current proxy rules, will be exempt from most of the proxy rules if the conditions are satisfied.

SEC Nov-07 Sample Published a prototype summary prospectus, a streamlined prospectus for Comments due Feb. 28.prospectus mutual funds as part of the rule proposals on fund disclosure.

SEC Nov-07 Mutual fund Proposed rules that all mutual fund investors receive a clear, concise Comments due Feb. 28.disclosure summary of key information needed to make an informed investment decision.

The rule changes would also encourage funds to harness the power of the Internet to allow investors to choose the format in which they receive more detailed information.

SEC Nov-07 EDGAR Proposed several amendments to rules regarding the Electronic Data Comments were Gathering, Analysis, and Retrieval system, specifically to amend rules due Dec.14.to make mandatory the electronic submission on EDGAR of applications for orders under any section of the Investment Company Act.

SEC Nov-07 Exemptive Proposed that mutual funds and other companies seeking exemptions under Comments were applications the Investment Company Act of 1940 submit their applications electronically due Dec. 14.

so investors can access them sooner and the Commission can considerthem more quickly.

Commodity Futures Nov-07 Foreign-based Adopted regulatory amendments that exempt foreign firms from registration Became effective Dec. 14.Trading Commission intermediaries as a futures commission merchant and any associated requirements, if they

limit their customers to persons located outside the U.S. and submit transactions executed on U.S. exchanges for clearing on an omnibus basis through a registered FCM.

Public Company Dec-07 Cross-border Proposed a policy statement that identifies factors relevant to full reliance by Comments due March 4.Accounting Oversight inspections the Board on the inspections programs systems of its non-U.S. counterparts Board that are sufficiently rigorous under the Sarbanes-Oxley Act.

Financial Industry Dec-07 Expungement in Approved proposal to impose expungement procedures requiring arbitrators Pending SEC approval.Regulatory Authority arbitration to take specific steps, including issuing a written explanation, before

recommending expungement of information related to arbitration cases from a registered person’s Central Registration Depository record.

The following is a roundup of selected current regulatory proposals, notices and directives collected from officialbulletins and other sources which are deemed reliable. The chart is updated each issue. To notify CR of new measurescall Ben Maiden at (212) 224-3281, fax: (212) 224-3686 or e-mail [email protected]. Shaded items indicate

a new or updated entry.

Note: Go to www.compliancereporter.com to experience the new Online Interactive Regulatory Alert calendar. Updated daily, the online calendar provides users with more complete listings ofnew regulations, personal watchlists and links to rules, notices, related stories and legal commentary.

Regulatory Alert

CR122407 12/20/07 12:38 PM Page 14



North America (cont’d)Regulator Date Topic Particulars Status

FINRA Dec-07 Derivatives under SEC approved FINRA exemption under the TRACE reporting requirements for Became effective Dec. 13.TRACE Derivative-Related Transactions, which are transactions in TRACE-eligible

securities resulting from the exercise or settlement of an option or a similar instrument.

FINRA and New York Dec-07 Securities Filed with SEC proposal to amend NYSE Rule 342.13 to eliminate the Pending SEC approval.Stock Exchange exam requirement that the Series 24 be passed after July 1, 2001 to be recognized

as an alternative to the Series 9/10 supervisor qualification exam.

FINRA Nov-07 International Proposed guidance regarding international prime brokerage practices that Comments due Jan. 10.prime brokerage practices draws on an SEC no-action letter from 1994 and covers

areas that include account arrangements and books and records.

NYSE Dec-07 Firm membership Filed with SEC for immediate effectiveness, pending any comments, proposal Estimated effective date to extend to June 30, the operative date of NYSE Rule 2 requirement that Jan.1.NYSE-only member firms apply for and be approved as a member of FINRA.

Municipal Securities Nov-07 Three-hour Proposed amendment to Rule G-14, Reports of Sales or Purchases, to extend Becomes effective dateRulemaking Board exception to June 30, 2008 the expiration date of the three-hour exception to the of Dec. 31 when current

15-minute reporting deadline for new issue municipal securities. exception expires.

California Department of Dec-07 Investment Set a later comment deadline for proposed amendments to Rule 206.204.9 Comments due March 31.Corporations adviser that would remove the registration exemption for advisers such as hedge

registration fund advisers if they are not advisers to venture capital companies.

Ontario Securities Dec-07 SEDI Proposed amendments to the National Instrument 55-102 on the System For Comments due Feb. 5.Commission Electronic Disclosure by Insiders including that self-filing insiders who log

on to SEDI using their user ID and password will no longer have to also inputtheir access key, except when first linking to their profile.

OSC Oct-07 Continuous Proposed amendments implementing National Instrument 51-102 on Comments due Jan. 11.disclosure continuous disclosure obligations, including reducing the requirement for obligations issuers to disclose cease trade orders and similar orders issued against

companies with which the directors, executive officers and significant shareholders of the issuer were involved.

EuropeRegulator Date Topic Particulars Status

Level 3 Committees Nov-07 Medium Term The European Commission committees (CESR, CEBS and CEIOPS) Feedback due Jan. 18.Work Programme published a consultation, related to the ongoing review of the Lamfalussy

process, to contribute to the discussion on ways to enhance regulatory andsupervisory consistency across sectors for delivery in the period to the end of 2010.

Committee of European Dec-07 Markets in Launched consultation on how to best improve the functioning of the MiFID Feedback due Jan. 21.Securities Regulators Financial database on shares admitted to trading on regulated markets that sets out

Instruments in further details the current functioning of the database. Directive

CESR Oct-07 UCITS Published a consultation paper on content and form of Key Investor Feedback was due Dec. 17.Information disclosures for Undertakings for Collective Investments in Transferable Securities document that would replace the Simplified Prospectus. The paper is part of CESR’s ongoing work in the revision of the UCITS Directive.

Financial Services Dec-07 Close links Proposed to remove the annual close links reporting requirement and specify Feedback due March 14.Authority (U.K.) in more detail the format of event driven/monthly close links notifications.

FSA Nov-07 Contracts for Proposed greater disclosure of significant economic interests in a Feedback due Feb. 12.difference company’s shares held through derivatives such as contracts for difference

stating potential market failures could occur from using undisclosed CfDs.

Asia–PacificRegulator Date Topic Particulars Status

Dubai Financial Services Dec-07 Hedge funds Issued a hedge fund code of practice that includes nine high-level principles, Becomes effective Jan. 20.Authority which cover areas of key operational, management and market-related risks,

particularly in the areas such as valuation of assets, back office functions and exposure to market risks.

Securities and Futures Nov-07 Electronic Proposed to mandate electronic submission of disclosure of interests notices Comments due Jan. 11.Commission (Hong Kong) disclosure by substantial shareholders, directors and chief executives of listed companies.

notices

CR122407 12/20/07 12:38 PM Page 15



“They don’t want to use the budget only to find it’s not the realbudget.” Some firms, Carter said, set their ’08 budgets beforethey recognized the extent to which they would be affected byfallout from the subprime market woes.

A compliance officer at a broker/dealer in New York saidmany in the industry are waiting until after the holidays to seehow their spending for next year will play out. Firms hit byfallout from the subprime market woes may need to invest morein risk management and fixed income compliance, he added.

While industry professionals don’t expect many complianceteams to be hit with cuts, they predict that some will be asked todo more with no additional resources.

Areas such as anti-money laundering are less likely to suffercuts because they are seen as an area of high regulatory focus (seerelated story). Despite this, in 2008 there will be increased talkabout conducting some AML compliance operations—such asclient due diligence and data gathering—offshore in a bid to savecosts, according to Steven Beattie, principal with Ernst & Youngin New York.

“There’s a danger that there is going to be a lot of pressure onCCOs to do more with the same or less, and that’s not a goodrecipe for success,” said Michael Zeldin, principal with DeloitteFinancial Advisory Services in Washington, D.C.

—Ben Maiden

TOUGH TIMES(continued from page 1)

authorities to develop their AML programs. Now, however,regulators will be looking to “evaluate the fruits of their efforts”and will have higher expectations that firms have effective,sustainable programs and may bring enforcement actions wherethis is not the case, he added.

Michael Lord of recruiter Michael Lord & Co. said he isworking with a medium-sized B/D based in New York that islooking to hire two AML compliance specialists in the firstquarter of 2008 and a larger firm that is unsure how many itwants to add during the first quarter. Also looking to hire at leastone AML specialist in the first quarter is a Connecticut-basedhedge fund firm and a New York hedge fund firm, Lord said.

The potential costs of failing to have effective AML systemsare also likely to insulate the sector from some of the pressures onother aspects of firms’ compliance efforts (see related story).“AML is among the issues that should be far down the list thatbanks want to cut from, because the penalties for a failure arecolossal,” said Michael Zeldin, principal with Deloitte FinancialAdvisory Services in Washington, D.C.

AML staff with technological skills will be in particular

AML STAFF(continued from page 1)

Quote Of The Week“We are recruiting actively and expect to have a chunk of the peoplewe are looking for by the end of the first quarter.”—Margaret Cole,director of enforcement at the U.K. Financial Services Authority, onplans to recruit new criminal and forensic staff (see story, page 1).

One Year Ago In Compliance ReporterThe Securities and Exchange Commission was urging firms tobegin using eXtensible Business Reporting Languagetechnology. [Investment Company Institute general counselKarrie McMillan recently warned that using XBRL to isolateindividual pieces of data could harm investors (CR, 12/17)].

Bar Stool

Naughty Or Nice?As those who follow his exploits know, Santa Claus has a listof those naughty boys and girls who won’t be gettingChristmas presents (CR is assured that it’s not on that one).The sad news this year is that it just got a little harder to getonto the Nice List—at least, if you’re a broker. Earlier thismonth the Financial Industry Regulatory Authorityannounced that its board of governors had approved a rulechange requiring arbitrators to take certain steps, such asreleasing a written explanation, before recommending theexpungement of information relating to arbitration cases fromregistered individuals’ record. According to FINRA, thechange is intended to provide assurance that expungementhappens only on the grounds of factual impossibility, noinvolvement by the registered person or falsity. Whether thechange will get FINRA off the Naughty List of state regulatorswho have raised questions about the expungement processis a question for the New Year.

demand. Regulatory examinations are increasingly sophisticated,including a focus on technological systems, and raise morecomplex questions, Zeldin said. As a result, he said, firms arelooking to have highly skilled in-house specialists who can dealwith issues as they arise.

Demand for AML staff is likely to be felt across the pay scale,according to recruiters and consultants. Lord said the greatestneed will be at the junior level, at which employees cancommand between $75,000 and $100,000 in base salary. Otherindustry professionals said they expect to see strongest demandfor senior, sophisticated candidates with experience at one of theregulators, law firms or consulting firms.

—-Josh Stoffregen and Ben Maiden

CR122407 12/20/07 12:38 PM Page 16

Documents

FSA Boost Enforcement