How to Build a Culture of Compliance
When investment professionals use their considerable expertise to perpetuate a fraud, they usually rely on that same expertise to cover it up. The more complex the financial instrument or approach, the better, since most people are uncomfortable questioning things they may not understand.
AGI US's Structured Alpha Fund Collapses
This was the blueprint that Allianz Global Investors U.S. LLC (AGI US) followed when it came under fire for selling a complex options strategy, known as “Structured Alpha,” to 114 institutional investors, including pension funds for teachers, clergy, bus drivers, engineers, and other individuals. The SEC charged AGI US and three former senior portfolio managers with “a massive fraudulent scheme that concealed the immense downside risks of a complex options trading strategy” and “defrauding investors over multiple years, concealing losses and…failing to implement key risk controls.”
AGI US pleaded guilty to securities fraud and agreed to pay $5.8 billion in fines and restitutions—among the largest investor protection violations in corporate history. Additionally, AGI US was banned from offering and conducting advisory services to U.S. registered investment funds for the next 10 years. The Commodity Futures Trading Commission (CFTC) is revoking AGI US’s registration as a commodity trading adviser and commodity pool operator.
Building a Culture of Compliance
What led to this breakdown? The Department of Justice, in its press release, gives us a good reason: “Much of this historic fraud was made possible because AGI’s control environment was not designed to verify that Tournant and his co-conspirators were telling investors the truth. Because AGI, a registered investment adviser, failed to provide meaningful oversight…” A remedy to this breakdown of “meaningful oversight” is to build a culture of compliance and ethics within your company. There are several components to building a strong culture of compliance and ethics.
Culture of Compliance Starts at the Top
All individuals, including those at the top, should have an in-depth understanding of SEC and compliance restrictions. Senior leaders should lead by example and set out clear protocols for others. This not only means informing employees of compliance restrictions, but also making sure clear protocols are in place for breaches if restrictions are violated. Integrating a strong compliance culture from the beginning of an employee’s tenure and leading by example are some ways executives can establish a solid compliance program that meets regulatory requirements.
Proper Training, Consistent Reinforcement of Policies are Key
A key component to building a strong culture of compliance and ethics is training. Regular training sessions should be conducted on a yearly or biennial basis to review compliance restrictions. High-risk groups, like portfolio managers and traders, should receive training to ensure they are up to date with the most recent regulations and updates.
Having clear compliance processes and infusing compliance into your firm’s culture can also keep compliance top of mind for your employees. Information from training sessions and compliance policies should be readily available to employees (i.e., via a company intranet) and firms should have the ability to communicate regulatory and SEC restrictions to employees at a moment’s notice.
Utilize Technology to Strengthen Your Compliance Program
Can compliance professionals, with their current workloads, really be expected to identify this type of fraud that occurred at AGI US? No, not alone. They need help from other parts of the organization, and Technology can be a great partner in helping to avoid problems. Automated compliance systems can fill in the gaps and help compliance teams become more efficient. Talk to us about how we can help.
