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Wednesday, March 20, 2013

SEC Enforcement Chief Doesn't Trade Horses

Reported by Tommy Fernandez

Expect the SEC to be tough, demanding, inquisitive on a number of mutual fund issues this year,... and don't even think about horse trading with the agency.

These were some of the messages imparted to fundsters Wednesday during a general session at the ICI Mutual Fund and Investment Management conference held this week in Palm Springs.

The two SEC officials attending the panel discussion were George Canellos, acting director of the Division of Enforcement and Carlo di Fiorio, director of the Office of Compliance Inspection and Examinations of the SEC.

Canellos treated audience members to a number of personal insights regarding the soon-to-be new boss of the SEC, former prosecutor and defense attorney Mary Jo White, with whom Canellos worked with in the past.

White, he said, is extremely demanding. She gets up at 4 a.m. and reads all the papers by 5 a.m. and calls people up by 5:30 am. to ask them what they are doing about what she reads about.She is extremely non-partisan.
She is all about integrity. Every case needs to be judged on its own merits. Very grounds up. Look at the evidence first and determine where it takes you. Look at who to sue without fear or favor. She has great prosecutorial instincts, quasi-judicial instincts she brings these in spades. She makes it a point to avoid articles that involved her case. You should be internally guided by principle, rather than responding to others. She will be a very principled, internally guided person in the way she evaluates everything. I think it is a wonderful thing for enforcement. She gets its.

White, he said, also doesn't have a one size fits all attitude to cases. She recognizes that each case is different, that nuances matter. She will be open to flexible approaches to the facts of the individual cases.

"She will be very sensitive to her role as a quasi judicial official," he said. "As a prosecutor, you really have people's lives in your hands."

Canellos expressed a similar tough, yet cautious approach to enforcement.
I proceed on the assumption that if we sue that we sue a regulated entity, they will sell. They don't have the luxury of running a multi-year battle with their primary regulator. Most don't have the luxury to defend. You need to appreciate that.

He said he viewed his job as 80 percent judicial and 20 percent prosecutorial.

Canellos also made it clear that he doesn't engage in horse-trading

"I don't negotiate on settlements," he said. "I assume I can build my case and do what I can."

He wasn't phased at all by the subject of statistics related to SEC cases. Statistics shouldn't be a guide for enforcement activities. 'We can always up the cases if we want. We can always up the penalties we want."

Regarding whistleblowers, Canellos said that "we investigate all cases no mater that the source." From Dodd-Frank whistleblowers to exams, to newspaper reports to other kinds of informants.

Di Fiorio noted that the SEC has an Office of Market Intelligence that receives at least eight complaints a day.

"It has an impact," he says.

A good bit of the conversation was devoted to the national sweeps of exams on the distribution process, which started on March 11. Di Fiorio explained that the idea was developed during one of the biweekly meetings that take place with officials from several divisions at the SEC, including investment management, compliance and examination and enforcement.

Di Fiorio admitted that issue of distribution payments was not new, in fact the SEC had last dealt with the subject in a similar review ten years ago. The review will examine how the payments have evolved since then.

"We haven't look at it since then. A lot has changed."

For example, there are a growing number of fees that now go beyond the 12b-1 process, and board review, such as fees paid by advisors including revenue sharing and conference support. There are also fees paid by the fund to the distributor for sub-accounting or client servicing payments.

"The question that all of this raises is how these payments evolved. Are they being done in accordance with the regulatory regime to make sure there is really good control."

The sweeps will lead to better guidance for funds in this area, and where significant violations are found, there will be enforcement.

There will also be greater reviews as well of negligence amongst professional service providers and related gatekeepers.

"Gatekeepers have always played a critical role in compliance with the law," Canellos said. "They play a more critical role now more than ever."  

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