2015

A convenient notebook with

a variety of action steps,
approaches and information
for the compliance year.

C C O P L AY B O O K

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CCO PLAYBOOK

Table of Contents

SEC Insight--Excerpts from the SECs FY 2015 Budget Proposal

The Convergence of Compliance and Technology

Your CEO manages to this 4

Cash Generation 4
Everybody Counts 4
Return on Assets 5
Making Margin Meaningful 5
Making Velocity Meaningful 5
Growth 6
Customers 7
Minimizing CCO Liability 8
Risk Assessment ChecklistBroad Categories That May Apply

13

And the Surveys Said . . .

14

Nine Reasons People Dont Do What They Are Supposed To Do

16

For updates on compliance and associated steps the CCO can take,
please visit our blog at http://www.financial-tracking.com/blog/

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SEC Insight--Excerpts from the SECs

FY 2015 Budget Proposal
The SEC is requesting $1.7 billion in support of 5,183 positions and 4,688 FTE for FY
2015. This requested budget level would allow the SEC to hire an additional 639 positions to
accomplish several key priorities, including:
Remedying inadequate examination coverage for investment advisers and other key
aspects of the agencys jurisdiction;
Strengthening our core investigative, litigation, and analytical enforcement factions;
Continuing the agencys investments in the technologies needed to keep pace with
todays high-tech, high-speed markets; and
Hiring additional staff experts to enhance the agencys oversight of the rapidly changing
markets and increased regulatory responsibilities.

This budget request focuses on addressing these resource challenges by increasing funding
in the following areas:
Expanding oversight of investment advisers and strengthening compliance;
Bolstering enforcement;
Leveraging technology;
Building oversight of market infrastructure derivatives and clearing agencies;
Supporting implementation of the JOBS Act and enhancing reviews of corporate
disclosures;
Focusing on economic and risk analysis to support to support rulemaking and
oversight; and
Enhancing training and development of SEC staff.

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The Convergence of Compliance

and Technology
As chief compliance officers (CCOs) assess their compliance programs, plan improvements,
and determine the associated costs, they quickly realize that technology is integral to the
solution. Compliance can leverage technology to automate processes and maintain audit trails
while greatly improving efficiency, precision, and overall effectiveness.
More importantly, technology can play a key role in fulfilling requirements to test the adequacy
of compliance policies and procedures. It allows compliance to focus on analyzing results and
identifying potential violations rather than performing labor-intensive, manual reviews.
Regulators and investors expect to see technology integrated into compliance programs,
demonstrating a robust culture of compliance. And in the face of growing regulatory demands
for information, technology can assist with timely production of key indicia of the operation of
the compliance program.
In addition, senior managers, boards, and audit committees are demanding more assurance
with respect to compliance as they are asked to certify, report on, or oversee the effectiveness
of the compliance program. Technological tools can help provide a stronger foundation for
these representations.
Integrating Technology the Right Way
The SEC is requesting $1.7 billion in support of 5,183 positions and 4,688 FTE for FY Many
firms, they are not capitalizing on the robust compliance technology solutions available. Some
firms maintain manual compliance processes, which are time consuming, costly, and prone
to error. Others combine manual and automated processes, making it difficult to reconcile
date and ensure accurate and timely reporting. Some have done piecemeal compliance
automation. This approach usually leads to disparate, nonintegrated systems that are costly to
maintain and do not provide a consolidated view of risks.
Organizations that do not leverage technology to modernize their compliance programs may
find that they utilize valuable human resources on manual processes that could be directed
to better use. They man put the firm and its 1 employees at risk by not having as broad or as
deep a focus on compliance risks as other firms and missing indications of noncompliance
that would otherwise be revealed and addressed early. And, as technology advances they will
find that they are not meeting industry best practices or even industry standard practices.

Adapted from PWC white paper

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Your CEO manages to this1

Money making in business has three basic parts: cash generation, return on assets (a
combination of margin and velocity), and growth. True businesspeople understand them
individually as well as the relationships between them. Add consumers to these three pans of
money making-cash generation, return on assets, growth-and you have the core, or nucleus,
of any business.
Cash generation, margin, velocity, and return on assets, growth, and customers: Everything
else about a business emanates from this nucleus. Does the business generate cash and
earn a good return on assets? Are we retaining customers? Is the business growing? If
so, common sense tells you that the business is doing well. A large, complex company will
eventually falter if this core is not right.
Dont let your formal education or the size of your company obscure the simplicity of your
business. Think like the street vendor. Cut through to the nucleus of the business. If your
business shows deterioration in one or more of the basic components of money making,
use common sense to fix it. If you do, you are on your way to thinking and acting like a true
businessperson and a successful CEO!
Cash Generation
Cash generation is one of several important indications of money-making ability. An astute
businessperson wants to know, does the business generate enough cash? What are the
sources of cash generation? How is the cash being used? Any businessperson who fails to ask
these questions and figure out the answers eventually stumbles.
Cash generation is the difference between all the cash that flows into the business and all
the cash that flows out of the business in a given time period. Cash flows into the corporation
from sources like the sales of its product or services that are paid for in cash and payments
by customers for previous sales made on credit. Cash flows out of the business for items like
salaries, taxes, and payments to suppliers.
Everybody Counts
Most people can understand cash on a small scale, in their own everyday life. If the bills
are due before the paycheck arrives, what happens? In a large company, however, some
people lose sight of cash. Many think thats the responsibility of the finance department. But
everyone in a company must be aware that his actions use cash or generate cash.

Adapted from What the CEO Wants You to KnowHow Your Company Really Works by Ram Charan, 2001.

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Return on Assets
You might think that making money simply means making a profit-buying low and selling
high. But theres more. Regardless of the size or kind of business, youre using your own
or someone elses money to grow. You borrow from a bank or use your savings. That money
represents your investment, or your investment capital. If you inherit the business, the
investment is given to you. Your investment then takes one form or another, whether it be
products (inventory), a small store and some shelving (plant and equipment), or an IOU from a
customer who took something home (accounts receivable).
The things youve invested in are assets.
Making Margin Meaningful
The term margin refers to net profit margin after taxes. That is, the money the company earns
after paying all its expenses, interest payments, and taxes. These expenses include all the
costs associated with making and selling the product as well as running the business, making
interest payments on any loans, and paying income taxes.
Gross margin, from which net profit margin is derived, is also critical to understanding the
fundamental anatomy of the business. Gross margin is calculated by taking the total sales for
the company or a product line and subtracting the costs directly associated with making or
buying the product or service.
Many businesspeople and investors track gross margin because it provides clues about
important changes that are affecting the nature of the business.
Making Velocity Meaningful
Many people focus on profit margin, but they overlook velocity. Heres what makes successful
CEOs different from many other executives: They think about both margin and velocity. This
dual focus is the centerpiece of business acumen.
Velocity is important to every company.
As you hone your business skills, think hard about return on assets and its basic ingredients
of velocity and profit margin. Look at your own companys return on assets. If you dont think
its adequate, press for ways to improve it. Even if you dont have all the answers, you can
help by asking the right questions: How does your companys return on assets compare with
the best in the industry? Over the past few years, has it been improving or declining? What
companies in any industry have the highest margins, the highest velocity, or the highest return
on assets? What can you learn from them?

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One truth about business is that the return on assets has to be greater than the cost of
using your own and other peoples (bankers and shareholders) money, the cost of capital.
If the return on assets does not exceed the cost of capital (which is typically 10 percent or
more), there will be real discontent among the investors because management is destroying
shareholder wealth. Some companies have businesses, divisions, or product lines that do not
earn the cost of capital. They therefore have to either improve the return or get rid of these
lines of business. Thats how many CEOs or business unit executives make the decision to sell
(divest) a business or discontinue a product line. Jack Welch used this principle at GE in the
early 1980s when he said that any business within GE that could not be number one or two
in its industry and did not earn the appropriate return on shareholder investment had to be
either fixed or sold.
Even if you dont know your companys cost of capital, you can make a difference by
suggesting ways to improve the return. If, for example, you work for an automobile company,
you might find that the return, on small cars is problematic. Auto manufacturers around the
world have in fact been earning less than 2 percent return on their automotive assets on
small cars, which is less than the cost of capital. How might that part of the business generate
a higher return? Think about both parts of return on assets: margin and velocity.
Growth
Growth is vital to prosperity. Every person, every company, and every national economy must
grow. Are you working for a company that is growing? Is it growing profitably and with no
decline in velocity? What happens when the growth rate is low or even negative?
If the company as a whole or your business unit lags behind competitors, your personal
progress will suffer. If the companys sales are flat for five or six years, people will not have the
opportunity to be promoted and move forward. Top managers will begin to cut costs, cut the
number of employees, cut layers. Theyll start reining in R&D and advertising, good people will
leave, and eventually the company will go into a death spiral. People will suffer.

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Customers
The street vendor knows his customers well. Simply by watching them, he can detect whether
they like his fruit or are growing dissatisfied, and whether their preferences are changing.
CEOs with business acumen have the same close connection with customers and strong
conviction that the business cannot thrive without satisfying them. Its universal.
Although many companies use scientific research methods like surveys and focus groups
to try to understand consumer needs, the best CEOs dont rely on clinical data alone. They
know that if they become removed from the action, they may miss important changes and
opportunities in the marketplace. Many of them make special efforts to observe and talk
directly with the people who use their products and services. Without customers trust, the
rest doesnt matter.
As you think about consumers, keep it simple. How can you describe what consumers
are buying? It might not be the physical product alone. Maybe theyre buying reliability,
convenience, or service. For many businesses and for the street vendor, what consumers are
buying includes trustworthiness. Many businesses run into trouble because the leaders lose
touch with consumers.

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Minimizing CCO Liability

The Laws and Regs
Exchange Act 15(b)(4)(E)
The Commission may impose a sanction on an associated person who has failed reasonably
to supervise, with a view to preventing violations of [federal securities] statutes, rules, and
regulations, another person who commits such a violation, if such other person is subject this
supervision.
The Safe Harbor
A person is not liable if:
1. There have been established procedures, and a system for applying such
procedures, which would reasonably be expected to prevent and detectany such
violation by such other person, and
2. Such person has reasonably discharged the duties and obligations incumbent upon
him by reason of such procedures and system without reasonable cause to believe
that such procedures and system were not being complied with.
Exchange Act Enforcement Powers
Section 15(b)(6)
Permits the SEC to sanction individuals for specified offenses, including failure-tosupervise as specified in Section 15(b)(4)(E).
Potential sanctions include barring or suspending a person from associate with a
registered entity.
Section 21C
Enables the SEC, after notice and opportunity for hearing, to enter cease and desist
orders.
The SEC may require any person who is violating, has violated, or is about to violate
the securities laws to cease and desist from doing so.
The SEC may also enter a cease and desist order binding on any other person that
is, was, or would be a cause of the violation, due to an act or omission the person
knew or should have known would contribute to such violation.
Cease and desist orders may also require affirmative steps to effect future
compliance.

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Section 32
Authorizes the SEC to impose fines on individuals who willfully violate securities laws
or regulations.
Investment Advisors Act
Section 203(e) creates failure to supervise liability using similar language to
Exchange Act 15(b)(4)(E), with a similar safe harbor.
Section 203(i)(iv) authorizes the SEC to impose fines on individuals who fail
reasonably to supervise within the meaning of 203(e).
Section 203(k) gives the SEC the authority to issue cease-and-desist orders, with
language similar to Exchange Act 21C.
Rule 206(4)-7, 17 C.F.R. 206(4)-7, requires investment advisers to implement written
policies and procedures and to designate a CCO. In its discussion of the rule, the
SEC observed that the title of CCO does not, in and of itself, carry supervisory
responsibilities. 68 Fed. Reg. 74720.
FINRA Rules
Rule 3010
Requires member firms establish and maintain a system to supervise the activities
of each registered representative, registered principal, and other associated person
that is reasonably designed to achieve compliance with applicable securities laws
and regulations.
Establishes detailed requirements for the system that member firms must have in
place.
Rule 3130
Requires all members to designate and identify a chief compliance officer.
Requires the chief executive officer, or equivalent, to meet with the chief compliance
officer each year, and certify that the member has compliance processes in place
that meet certain requirements.

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Rule 8310
Authorizes FINRA to impose sanctions, including fines, suspension or revocation of
registration, and cease and desist orders, on firms or individuals.
The SEC reviews FINRA sanctions under 19(d) and (e) of the Exchange Act.
Other Rules
Commodity Futures Trading Commission (CFTC) regulations require diligent
supervision. See 17 C.F.R. 166.3.
Banking regulators, including the Federal Reserve and the Office of the Comptroller
the Currency (OCC), have enforcement powers under the FDIC Act, e.g.
The power to issue cease-and-desist orders against individuals or institutions
who engage or are about to engage in violations of law or in unsafe and
unsound practices. FDIC Act, 12 U.S.C. 1818 (b).
The power to remove individuals from office or prohibit them from the industry
when they, directly or indirectly. Engage in certain types of misconduct. FDIC
Act, 12 U.S.C. 1818 (e).
The power to seek monetary penalties. FDIC Act, 12 U.S.C. 1818 (i).
Dual Registrant Issues
Inconsistencies between the two regulatory regimes. For example:
Custody
Prompt forwarding of assets
OBAs
Personal securities transactions
Recordkeeping
Heightened Risks for Dual Registrants
Conflicts of interest, in general
Best Execution
In the Matter of A.R. Schmeidler & Co., Inc. SEC Exchange Act Rel. No. 70089
(July 31, 2013)
In the Matter of Goelzer Investment Management, Inc. and Gregory W. Goelzer,
SEC Exchange Act Rel. No. 70083 (July 31, 2013)
In the Matter of mandarin Investment Counsel, Ltd., et al., SEC Exchange Act.
Release No. 70595 (October 2, 2013)
Supervision separate from compliance

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So . . .
Here are Some Preventative Steps that CCOs/GCs Can Take to Avoid Liability
1) Clear & concise procedures addressing reporting lines and responsibilities.
2) If you are overwhelmed by to many responsibilities, this situation must be corrected
(being too busy to do the job is not an adequate defense).
3) Tailored procedures: Remotely located financial advisors pose a significant
compliance challenge.
4) Ongoing training in areas for which you are responsible is a must.
5) If you are involved in an internal investigation, be sure the investigation is thorough
and appropriate action is taken. Consider outside assistance and, while documenting
certain actions is appropriate and can be a defense to potential allegations, there are
caveats
6) Delegation of tasks Be sure to follow up.
7) Escalate unresolved compliance issues; ensure clarity as to who is the decision
maker.
Situations that Have Resulted in CCO/GC Liability
1) Participation in the Wrongful Conduct.
2) Failure to Respond Adequately when confronted with red flag warning signals of
misconduct.
3) Failure to Establish, Maintain, and Enforce Compliance Policies and Procedures.
4) Failure to Properly Delegate Compliance Functions

How GCs and CCOs Can Protect Themselves

Proactive Steps to Take:
Clear job description
Clear organization chart
Use of compliance consultants and outside counsel
Remove yourself from email chains
Professional malpractice coverage (not just D&O) to minimize exposure, policies
and procedures might identify direct supervisors, state that compliance/legal give
advice, state that compliance/legal personnel do not affect conduct outside of their
departments, document which business line supervisor is responsible for handling
specific misconduct and when compliance/legal personnel are on committees,
document the advisory role.

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Common Pitfalls to Avoid

Dont ignore your procedures
Dont take on responsibilities and then ignore them
Be careful about being part of managements collective response to a problem.
Dont forget to supervise your direct-line employees
Dont ignore what the regulators have told you
Dont lie to the regulators or to anyone else
What do you do if the powers that we dont do the right things?
Paper to the files
Resign
Disclose to board
Disclose to regulators

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Risk Assessment Checklist

Broad Categories That May Apply
I. Compliance Policy Components
A. Portfolio Management
B. Trading Practices
C. Proprietary Trading
D. Disclosures
E. Custody
F. Books and Records
G. Advertising and Marketing
H. Valuation
I. Privacy
J. Business Continuity Plan (BCP)
K. Code of Ethics
II. SEC Hot Topics
A. Compliance Testing
B. Risk Management
C. Training
D. Technology
E. Role of the Chief Compliance Officer
F. Third Party Due Diligence
III. Products, Services and Clients
A. Initial Public Offerings
B. Derivatives
C. Private funds
D. ERISA
E. Regulatory Filings and Regulatory Contact
IV. Financials
V. Other
Trade Ticket Requirements
Books and Records Schedule

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And the Surveys Said . . .

1. Key facts of the 5th Annual Costs of Compliance Survey by Financial Tracking
Technologies, LLC.

The study showed that, even though highly affordable automated solutions exist, over
73% of risk and compliance tasks are still being performed manually and overall costs of
risk and compliance are going up. Money managers, BDs and hedge funds globally could
realize as much as $800 million in cost savings, and maybe more, from three primary
sources:
automation of risk and compliance tasks heretofore performed manually,
vendor consolidation resulting in scale and scope pricing economies , and
outsourcing IT that develops and maintains traditional risk and compliance solutions.

Compliance, and now risk, are taking on higher profiles in all firms. Global financial
conditions and eroding market structures are putting enormous pressure on profit
margins. The time has never been better for the C-Suite to review an analysis of potential
cost savings, noting that such a strategic decision could immediately enhance profits,
reduce risks and control costs for the long term and help firms exceed regulatory exam
and client due diligence efforts.

2. Notable Findings from the 2014 Investment Management Survey sponsored by ACA
Compliance, Investment Advisor Association and Old Mutual Asset Management
75% of respondents consider cyber security/data security/privacy to be a hot
compliance topic.
Despite claims that advisers widely rely too heavily on third parties for
recommendations on proxy voting decisions only 33% of advisers reported using
third parties for this purpose at all.
75% of firms indicated that their compliance testing has detected issues, none of
which was deemed to be material.
Of the firms responding that they detected material compliance issues, 33% indicated
that the issues were in the area of personal trading/code of ethics.

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3. Compliance officers lack adequate resources to address increased regulatory

obligations says Cipperman Study

A summer 2014 survey of the financial services community conducted by Cipperman
Compliance Services finds that firm leaders fail to properly invest in the compliance
function despite claiming that compliance is a key concern. Survey participants included
broker dealers, asset managers, alternative managers, and wealth managers.

The survey found that while the majority of financial service organizations say they value
compliance, few compliance professionals believe their firms are managing the burden
well.

A common finding was that firms are understaffing and underfinancing the compliance
function.

58% of asset managers state that they need to focus more resources on compliance.
Similarly, 83% of broker/dealers feel they need more resources to manage compliance
efforts. On average, 74% of those tasked with compliance duties believe their firms
should commit more resources to the compliance function.

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Nine Reasons People Dont Do What

They Are Supposed To Do
Ever noticed that people dont always do what they are supposed to do? Whether you
recently hired new employees for the first time or have l lengthy experience in leading teams
comprised of full -time, permanent staff plus contract workers, you may encounter situations
in which people e dont do what theyve been asked to do. Here are common scenarios and
suggested suggestions.
1. He is unable to change his habits, which are ingrained in how he executes day-to-day
tasks. Frequent reminders, retraining and disciplinary actions have no lasting impact.

Suggestion: Make changes to the environment and sequencing of work to break outdated,
unwanted patterns of behavior. Remove the temptation (perhaps an improperly used tool
or always-on website), rather than keep asking the employee to break bad habits.

2. She misunderstands the nature and scope of her work. Sadly, instead of asking questions
or signaling her confusion, she muddles through each day. Though her focus should be
on figuring out how to accomplish specific goals, co-workers and vendors dictate her
priorities.

Suggestion: Clarify your expectations for her position, updating and refining her job
description as needed. Coach her on techniques for dealing with outside pressures.
Confirm that you will provide direction and support but make sure that she develops the
ability to stand on her own without your continual intervention.

3. He is in a hurry. For whatever reason, he wants coworkers and vendors to execute hi s

ideas quickly. He may have had a late- in-the-season epiphany for a marketing campaign
or new product introduction. Or time lines are generally inconsequential to him.

Suggestion: Establish firm lead times that are nonnegotiable, especially if certain
ideas require execution by work areas with limited resources. Alternatively y, establish
processes to execute quick turnaround on ideas with high ROI potential outside of your
regular workflow.

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4. She lacks discernment and is unable to sort through whats important and whats
insignificant. Overloaded with information and short on insights, she waffles on decisions,
defers action until she gets more clarity, and chooses unwisely.

Suggestion: Provide regular coaching sessions to step her through the process of making
sound decisions consistent with your companys mission and its values. Communicate
direction and get involved in helping her make difficult choices early rather than later.

5. He is not getting the information he needs. System glitches and ill-designed reports
prevent him from getting alerts, exception reports and so on in a timely manner. The
information that he does receive takes hours to analyze in order to get relevant facts
needed to do his job.

Suggestion: Dont underestimate the need for timely, accurate information. Make sure
your technology team solves these information problems quickly. While waiting for a
strategic IT solution, develop a workaround that speeds up the reporting process.

6. She doesnt trust your judgment. Specifically, she believes that your guidelines are
inappropriate based on her perception of customer needs and companys brand
positioning. So she ignores your instructions and continually does things her way, which
she believes provides a superior experience to the customer and upholds the brand
message more appropriately.

Suggestion: Clarify her sphere of influence and reiterate your brand promise distinct
from her desires. Plus, give her honest, quantitative feedback on her effectiveness.
Set objective, quantitative goals that measure her performance objectively, rather than
allowing her to rely a general feeling that she is a doing a good job, serving the customer
well, and preserving the integrity of the brand promise.

7. His workload is overwhelming. Because he feels that that he cant possibly complete all of
his work, he tends to focus on tasks that he enjoys and finishes assignments that benefit
the most demanding (rather than the most important) customers. Other items are left to
languish, eventually causing problems.

Suggestion: Evaluate workload for feasibility and make adjustments if necessary.

Establish quality and timeline expectations so that proper emphasis is placed on
assignments and areas of accountability. Schedule periodic progress reviews on longerterm projects to make sure that there are no surprises close to deadlines.

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8. Its complicated. The assignment is so out of the ordinary and complex that she doesnt
know w here to begin, so she delays the start. Plus, her regular workload keeps her so
busy that there is little time to really consider how to tackle this project.

Suggestion: Move mundane tasks to another employee so that she can have time to
develop the project plan. Encourage her to ask questions so that you can s hare your
knowledge, point to resources, and help narrow decisions.

9. The wrong person is in the job. You discover that he doesnt have the problem-solving
abilities, mental courage or leadership abilities that you thought he did w hen you hired
him. He doesnt really understand how to bring innovation to the company, which you
need now more than ever.

Suggestion: Realize that not all problem s can be remedied by changes in your approach.
Instead of struggling with a difficult person who is slow to adapt to new circumstances,
can t sort through workload without hand-holding, and the like, change the assignments
of your staff members or find a replacement who can do what he is supposed to do.

For updates on compliance and associated steps the CCO can take,
please visit our blog at http://www.financial-tracking.com/blog/

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