Professional Ethics for Compliance Professionals

1. NRS Fall Compliance Conference • November, 6, 2009 • Las Vegas, NV • A Continuing Education Offering for the Compliance Professional Professional Ethics for Compliance Professionals Kurt Wachholz President and CEO Wellspring Compliance Ann Oglanian President and CEO ReGroup, LLC

2. Agenda • Introduction • Ethics • Fiduciary Duty • Conflicts of Interest • Best Practices • Roles • Professional Code for the CCO • Applied Ethics

3. Overview: Attorney Conduct • Address various issues contained in the Rules of Professional Conduct • The Rules of Professional Conduct and the various securities laws/regulations and Self Regulatory Organization rules of practice. • The legal and regulatory bases for ethical conduct by legal and compliance personnel (CA Rule 1-100. Rules of Professional Conduct, in General) • Discussion of recent regulatory and enforcement actions against such employees and several case studies.  • Attorney reporting rules, Sarbanes-Oxley requirements. • Maintaining clients' confidential information (CA Rule 3-100) • Financial relationships with clients with respect to gifts (CA Rule 4-400) 

4. Is Good Ethics Good Business? • Required by law • Preserves business value • Research:

5. Ethical Dimensions Company Management Co-worker Client Professional and Personal Relationships Family

6. Investment Management: Fiduciary Duty • Simple form: putting your client first • Conduct principles • Loyalty to/Best Interest of Client • Treat Clients Fairly • Full and Fair Disclosure • Respect for Confidentiality • Duty of Care (Reasonableness) • Best Execution • Rule 204A-1 of the Advisers Act Fundamental principles of openness, integrity, honesty and trust.

7. Conflicts of Interest – from Anecdote to Codification • Insider Trading • Gifts and Entertainment • Black-outs, restricted lists, prohibitions • Limitations on trading activities – short selling, market timing, etc. • Approved brokers, Limited Brokerage Accounts • New Investment Opportunities • Pay to Play • Political Contributions • Outside Business Activities • Confidentiality and Privacy • Dual Registrations

8. Best Practices: Practice of Compliance • Conflicts of Interest: Identification • Sanctions • Training • Reward Structures • Hotlines or Whistle-blowing Protection • Ethics Committee • Ethics Audit • Customize for your business

9. Workshop:Top Five Best Practices Ideas

10. Best Practices: How to Improve Conduct 1. Effective Training 2. CEO participation 3. COE (and forms) written in English 4. Lead by example • Imbed compliance conduct into performance evaluation • Non-retaliation

11. Stages of Compliance Program Development Tactical to Strategic • Set Enterprise Objectives • Coordinate analysis and action • Visibility to risk, exposure and • performance • Identify risks, Assess exposure • Prioritize actions • Use technology for multiple purposes • Efficiency • Automation • Seeing connections • Plan future approach • Get it done! • Operate in isolation • Marshall resources from wherever Source: AMR Research

12. How does the Code relate? What are the Roles? • “C-Suite”, executives • Managers and supervisors • Employees • Interns and temps • Service providers and sub-advisers • Job applicants Supervised and Access Persons

13. The CEO’s Role Send out COE reminders under the CEO’s signature Recruit a CCO from another company for your board’s audit/compliance committee Get an independent review of the compliance program; results reported directly to the audit/compliance committee Require vendors to embrace your commitment to compliance and ethics • Lead by example • Ensure the CCO has clout • Ensure the CCO behaves professionally • Incorporate compliance conduct into incentives comp • Discuss the ethics of business deals with senior management • Insist on tough discipline for top execs who break the rules or threaten retaliation • Co-present COE training

14. The CCO’s Obligation • Obligation • To the Public • To the Employer • To the Profession • Compliance Professional Code of Conduct • SCCE • NSCP • State-based attorney conduct rules

15. Issues Contained in the Rules of Professional Conduct • Model Rules for the (Legal) Profession • Preamble acknowledges that lawyers must be guided by “personal conscience” • Require honesty and integrity; one may not engage in conduct involving “dishonesty, fraud or misrepresentation” or make a false statement of fact • These concept can be applied to compliance officers as well • Ethical/moral dimension to being a Wall Street professional and especially a “Double Fiduciary”

16. Rules of Professional, continued A framework for the ethical practice of law. Not exhaustive of moral and ethical considerations. Not designed to be a basis for civil liability. Each state body that regulates lawyer conduct within its jurisdiction is free to adopt all or part of the Rules, or to reject them. The Rules address eight separate areas: (1) the client-lawyer relationship, (2) the lawyer as a counselor, (3) the lawyer as an advocate, (4) transactions with persons other than lawyers, (5) law firms and associations, (6) public service, (7) information about legal service, and (8) maintaining the integrity of the profession.

17. Legal and Regulatory Bases for Ethical Conduct by Legal and Compliance Personnel • 1933 Securities Act • 1934 Securities Exchange Act • 1940 Investment Advisers Act • 1940 Investment Company Act • ERISA • Section 307 of Sarbanes-Oxley Act of 2002 (SEC rules implementing professional responsibility for attorneys)

18. Advisory Professionals: Regulatory Framework SEC: • Section 206(1) and (2) of the Investment Advisers Act of 1940 – Prohibited Transactions by Investment Advisers • Rule 204A-1 of the Investment Advisers Act of 1940 – Investment Adviser Code of Ethics • Rule 206(4)-7 of the Investment Advisers Act of 1940 –Compliance Programs of Investment Advisers • Rule 17j-1 of the Investment Company Act of 1940 – Personal Investment Activities of Investment Company Personnel

19. Maintaining Clients‘ Confidential Information • Insider Trading/Confidentiality policies and provisions in Codes of Ethics • CA Rule 3-100 (Confidential Information of a Client) • How to monitor and ensure compliance

20. Financial Relationships with Clients with Respect to Gifts • Business reality of client development • NASD Rule • Code of Ethics Rules, Investment Advisers Act • CA Rule 4-400 (Gifts from Clients)

21. Instructive SEC Enforcement Actions • In the Matter of Monetta Financial Services Inc. - Rel. No. IA-2136 (June 9, 2003) http://www.sec.gov/litigation/opinions/33-8239.htm • In the Matter of Jamison, Eaton & Wood, Inc. - Rel. No. IA-2129 (May 15, 2003) http://www.sec.gov/litigation/admin/ia-2129.htm • In the Matter of Gintel Asset Management, Inc., et al., Rel. No. IA-2079 (Nov. 8, 2002) http://sec.gov/litigation/admin/ia-2079.htm • In the Matter of Strong Capital Management, Inc. et al. Rel. No. IA-2239 (May 20, 2004) http://www.sec.gov/litigation/admin/34-49741.htm

22. Stretch Break (11:20am to 11:30am)  

23. How to Rationalize Unethical Conduct: It’s easy! • I deserve it… • No one will get hurt… • No one will know… • Everyone does it…

24. Four Core Workplace Values • Fairness: Play by the Rules • Honest: Tell the Truth • Integrity: Keep your Promises • Respect: Treat others with dignity • How do you use these values in decision-making?

25. Is there a better way?

26. Language of Ethics • The Compliance Test • The Ripple Test • The Gut Check Test

27. The Compliance Test • What are the facts? What are the choices? • Are the choices legal? (The law is a minimum standard.) • Do they comply with regulatory expectations? • Do they meet your organization’s standards and values? • Process of Investigation. Get the facts.

28. The Ripple Effect Test • Does the decision reflect well on me and my organization? • What are the likely effects, good and bad, on my organization, my colleagues, my family, my community, and the wider world once the decision becomes widely known? • Process of Evaluation.

29. Ripple Effect

30. The Gut Check Test • Is the decision consistent with my core values? Does it feel like the right thing to do? Is this a decision I will be proud of? Will I be able to sleep at night? • Process of Reflection.

31. Our job is not to make up anyone's mind, but to open minds -- to make the agony of decision-making so intense that you can escape only by thinking." -- Fred W. Friendly

32. Situation #1 • You’re a rising executive just promoted to corporate controller. Shortly after you land the new job, several senior executives pressure you to distort the company’s restructuring charges in a way that would be misleading but not criminal. • What would you do?

33. Situation #2 • You join a nonprofit firm in a junior accounting role. As you review the year’s corporate donations, you quickly realize that no standard procedure exists to determine the value of in-kind donations (gifts in the form of goods or services rather than cash). Some of your most prolific donors inflate valuations to deceive the IRS. Your overworked executive director makes a point of emphasizing relationships above data. • What would you do?

34. Situation #3 • You’re a junior employee at a large investment bank. Hours before a client meeting, a portfolio manager tells you to review the portfolio of one of the bank’s smallest customers and find a new benchmark that will make it look like the portfolio had performed better than it really had. You know that the client remains with the bank as a favor to a friend who works there. • What would you do?

35. Situation #4 • You’re a Chief Compliance Officer of a registered investment adviser. You report to the firm’s General Counsel. She tells you that certain findings and recommendations you included in your draft written Annual Review report will provide a ‘path to a deficiency’ for the SEC and instructs you to delete them. • What would you do?

36. Situation #5 • You’re the CCO of a hedge fund that charges performance fees. You also serve as the firm’s CFO. When you start at the firm, the CEO tells you that they pre-pay themselves the performance fee every quarter based upon expected returns, which is what funds the operating expenses of the firm, including paying your salary. The CEO makes it clear that they intend to continue the practice. • What would you do?

37. Situation #6 • You’re responsible for your company’s travel and entertainment policy, which says that company business travel and entertainment policy limits employee travel meals (as apposed to non-employee entertainment) to no more that $100 for dinner. The CEO turns in an expense of $800 for a meeting of herself and five subordinates. • What would you do?

38. Situation #7 • You’re a portfolio manager that has worked with a couple for a number of years. They have been one of your favorite clients. Recently they have had marital issues. The husband contacts you and asks you to help him open an account so that he can transfer some assets over to it. He asks you not to tell his wife. • What would you do?

39. Situation #8 • You handle order processing for the firm and notice that an account does not have enough available funds to satisfy a recent transaction fee. You mention this to the portfolio manager and he says he will pay the fee since it is an important client and he would prefer not to bother him with such a minor charge. • What would you do?

40. Dealing with Ethics Breaches

41. To Do List • Read the SCCE Compliance Professional Code of Ethics (consider joining SCCE) • Think about your role in ethics • Help your CEO and Senior Managers • Consider how to improve your ethics training • Get clear on your firm’s ethical dimension

42. Polling Question • Send us examples of ethical situations.

43. Thank you Ann Oglanian President and CEO ReGroup, LLC 415-681-2230 Kurt Wachholz President and CEO Wellspring Compliance 404-606-0663