Naughty or nice? How boards can get on the SEC’s good side

Since the crisis, the SEC has been more focused than ever on board governance. Kevin Kelcourse, assistant director in the asset management unit of the SEC’s Boston office, told a NICSA GMM session that isn’t going to change. The first question from the Investment Division about a possible enforcement action is always, “Where was the board?”

iStock_000000843258SmallKelcourse shared characteristics of a “good” board:

  • Actively engaged in their duties
  • Asking tough questions, even if they miss one or two
  • Meeting regularly, including separately with the CCO
  • Meeting long enough to cover the necessary ground

On the flipside, here are some telltale signs of a “bad” board:

  • Taking for granted everything the advisory firm says
  • Not acting independently enough
  • Repeatedly making mistakes

Kelcourse was quick to say that he hasn’t seen many “bad” boards and acknowledged most are hard working. But sometimes they don’t get the truth from firm management. The question is: Do they push harder to get answers?

CCOs: The most “critical lever”

Getting to the truth is where the firm’s chief compliance officer comes in, says Kelcourse. He stressed the importance of complete disclosure to the CCO and the board, saying CCOs are “the most critical lever in the asset management space.”

The SEC wants to empower CCOs to do their jobs. Misleading a CCO is “a close second” to misleading SEC exam staff. What makes a good CCO? They understand the business and they know what their job is.  If a CCO leaves suddenly, particularly in the midst of an examination, it raises suspicions of misconduct.

The bottom line? Investigations will continue to focus on whether the board acted appropriately. The good news is many asset management firms and boards are listening.



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