Different Sides of Compliance

Compliance experts from both the buy side and sell side share their firms' top priorities for 2005 and technology's role in achieving them.

Charles Field
General Counsel and Chief Compliance Officer, Nicholas Applegate Capital Management

Compliance Agenda

"We think that '05 is going to be the year that clients begin to look at compliance more and more," says Charles Field, general counsel and chief compliance officer for San Diego-based fund manager Nicholas Applegate Capital Management (NACM). He explains that compliance is a top-down firmwide approach at NACM that begins with a comprehensive code of ethics that governs everything from personal trading to the giving and receiving of gifts. Compliance also is embedded in the firm's practices through four core committees.

The Best Price and Execution Committee includes employees from NACM's compliance, trading and finance divisions. Using independent third-party data, the committee compares the execution and commission costs that the firm's traders incur versus their competitors' costs. From that analysis, NACM can see whether the trading desk is getting best price and execution. Ultimately, says Field, the committee's main purpose is to ensure that the trading desk is "getting good value for their dollar."

Since it's the fiduciary duty of investment advisers (in most cases) to vote proxies for their clients, NACM's Proxy Voting Committee establishes guidelines on how the firm will vote on certain measures and what it should do when it's faced with a conflict of interest. A conflict of interest could arise if a client asks the adviser to vote for or against a particular issue for all the adviser's clients, Field explains. The adviser can vote only the client's shares as directed, and only can vote other clients' shares if the adviser believes it's in the best interest of those clients as well.

Any time a price for a security is no longer readily available or reliable, it's NACM's Fair Valuation Committee's job to establish a fair value for that security based upon policies and procedures approved by the board of trustees of the mutual fund. "The reason we established this Fair Valuation Committee is to prevent persons from arbitraging our funds or market-timing our funds," says Field. "It does irreparable harm to [shareholders] and we take whatever steps are necessary to prevent this."

Finally, the hot topic of soft dollars prompted NACM to form a Soft Dollar Committee and a two-tier system to address the firm's use of commissions. Field himself is the first checkpoint for any budget manager. "When they want to use soft dollar commissions to purchase research, I receive a copy of that request together with an explanation of why this fits within 28E," a section of the Securities Exchange Act of 1934 that provides a legal safe harbor to investment advisers that use soft dollar commissions, Field explains. "If it's a mixed use, they give me an allocation. If it's a simple data feed - Reuters, etc. - then it can be pretty much approved spot-on, on-site. But if it's something I haven't heard of and the allocation between hard dollars and soft dollars doesn't look right, then I have to go to the budget manager and press a little bit more" before signing the contract.

Field's decisions are reviewed by the Soft Dollar Committee. "The absolute thing that's on the top of our agenda is to be able to [prove to clients] that we have the proper tools, leadership and organization to prosecute a vigorous compliance campaign," he says.

Technology Focus

In an effort to adhere to client guidelines, NACM installed a new pre-trade compliance engine from Latent Zero in December. As of press time, the firm's main focus was ironing out the finishing touches. Field reveals that four vendors initially were considered for the project, including LineData, Charles River and MacGregor, but NACM ultimately went with Latent Zero because its product had the backing of the firm's technology and compliance groups. "The technology group told us that [the Latent Zero engine] had the most room to grow, and ... our compliance group felt that it was easier to handle than the other three because it has a Windows-based application that makes it easier to use for people accustomed to working with Windows," Field says. He adds that it's not often that technology and legal compliance agree on a technology, so when they do, "You'd better go with it."

Management Motto: "No surprises."

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Richard Neiman
Executive Vice President and General Counsel, TD Waterhouse

Anthony Verga
Director of Compliance, TD Waterhouse

Compliance Agenda

As regulators pressure the sell side on issues such as anti-money laundering, e-document retention and Sarbanes-Oxley, firms like New York-based TD Waterhouse are responding by boosting compliance efforts. "Several of our firm's key initiatives for 2005 are compliance and surveillance," says Richard Neiman, general counsel, TD Waterhouse. Neiman adds that broker and anti-money laundering surveillance in particular will be top priorities for the firm this year. "With respect to both of those areas, our focus continues to be twofold - on the customer to ensure investor protection and on the firm to protect its reputation and integrity," he says.

"Our firm's intent is to be as proactive as possible, taking advantage of the latest technologies and system enhancements to combat and prevent fraud and monitor for suspicious transactions," Neiman continues, pointing out that TD Waterhouse recently implemented a Web-based surveillance solution (see Technology Focus, at right).

Education is another initiative on TD Waterhouse's compliance agenda. Over the past two years, the firm has shifted paper-based training manuals and classes to Web-based training tools for areas such as regulatory rules, anti-money laundering and privacy. The training tool uses real-life scenarios and, according to Anthony Verga, TD Waterhouse's director of compliance, it's part of a firmwide effort to "educate frontline associates who deal directly with customers."

Employees are trained annually and new hires are required to complete the training module. "The anti-money laundering and privacy training modules are specifically discussed with the new hires; they're given the information and a window of time to complete them," explains Verga. "The training is then monitored to ensure that the associates complete the modules and pass the respective training exam," he adds.

Neiman says that the firm shifted to Web-based training for the ability to document and modify processes for changing regulatory and other developments. Other benefits of the Web-based program include better results in employee retention and education.

Technology Focus

In addition to Web-based education, Verga stresses that one of TD Waterhouse's top technological priorities has been the implementation of an enhanced surveillance solution utilizing Herndon, Va.-based Mantas. "Mantas will provide us with a Web-based solution for our anti-money laundering and various broker surveillance initiatives and tools," he says. But Verga declines to reveal the firm's reasons for selecting the technology provider.

Management Motto: "Good conduct breeds good business."