SEC Says that Cutting Compliance Spend is NOT a Good Idea

In a recent open letter to the CEOs of SEC-Registered firms, director Lori A. Richards urged companies to continue investment in compliance functions.

Your firm's compliance function is critical to assure that your operations comply with the law and rules for industry participation and to ensure that the interests of your customers, clients and shareholders are protected. Moreover, compliance is a vital control function that helps to protect the firm from conduct that could negatively impact the firm's business and its reputation.

While many firms are considering reductions and cost-cutting measures, we remind you of your firm's legal obligation to maintain an adequate compliance program reasonably designed to achieve compliance with the law.

She noted Chairman Cox's recent comments at the SEC headquarters as part of the 2008 CCOutreach National Seminar.

[E]xperience has taught us again and again that giving short shrift to regulatory compliance subjects a company's investors, employees, management, directors, and every other stakeholder to unacceptable risks….[C]ompliance programs have made huge strides in recent years in becoming more formalized and more robust…. Now more than ever, companies need to take a long-term view on compliance and realize that their fiduciary responsibility requires a constant commitment to investors. That means sustaining their support for compliance during this market turmoil, and beyond it as well.

Chairman Cox also noted:

You can't have a strong company without strong compliance, at every level — from strong CEO and executive support for the compliance team, to rigorous standards and processes, to broad financial and organizational resources for you to fully perform your duties.

That latter point bears emphasis. In a profit and loss driven world, there is always a risk that companies facing an uncertain economic future may choose to cut compliance expenses as a shortsighted way to save money. But experience has taught us again and again that giving short shrift to regulatory compliance subjects a company's investors, employees, management, directors, and every other stakeholder to unacceptable risks.

Today, when the future is uncertain, when markets are unstable, when investor confidence is shaken, this is the time — more than ever — when we need a powerful voice for compliance.

When a company cuts compliance, violations will occur. And if violations occur, punitive actions should and will be taken. In the current environment, that is true now more than ever. There will be no favor granted because a company made a cost-cutting decision to minimize their compliance budget. That's because now and always, the interests of investors are inextricably linked to strong compliance.

These comments were primarily intended for investment companies covered by the Division of Investment Management and the Office of Compliance Inspections and Examinations. That said, these comments clearly indicate the SEC's point of view about compliance generally. A point of view that should be carefully considered.